Eight out of ten businesses fail within the first 18 months of their founding.
An article by Forbes indicated that two of the top 20 reasons for business failure were due to cash-related issues. Starting a business is an expensive endeavour with many hidden and unexpected costs that will come up during the process.
Here are some reliable options to secure funds for your business.
1. Start-up Programs
- Accelerators: Accelerators are the way to go if you’re looking for an intense period focused on building the foundation of your business, with the right mentors and partners to support and guide you. Typically a short-term program, start-up accelerators offer mentorship, access to potential investors and business partners, and lastly, seed investment. Accelerators are designed to help a start-up gain resources and knowledge that would typically take years to achieve, in just a few months. However, accelerators are extremely selective and often look for start-ups with promising MVPs and founders. Some of the famous accelerator organisations include Y Combinator, 500 Startups and Techstars. Companies like Airbnb, Dropbox, and Udemy are all alumni of accelerator programs.
- Incubators: Knowing the difference between incubators and accelerators can help you focus on finding funding in the necessary business areas, and improve your chances of success. Incubators are smaller, less intense, and selective when compared to accelerators. Incubators often help start-ups build out their business foundation and are focused on the start-up’s long-term success.
How do you go about securing funding if your business is not considered a fit by a start-up accelerator or incubator? You can also secure funding with either of these options; debt-free funding or debt-based financing.
2. Debt-Free funding
- Personal Savings: You are the initial investor in your start-up. Investing money you have saved can give your business the boost it needs outside of your time and energy. Investing in yourself and your start-up can act as a great symbol to potential investors as you have a vested interest that can be quantified.
- Crowdfunding: Mostly done via the internet, crowdfunding can help you collect money from a large number of people that can contribute small or large amounts. Carrying a low financial risk, your campaign could go viral, you can raise funds without the cost of losing equity. A successful campaign also serves as validation for your business idea. However, it can be quite a timely and expensive process (if you have to build prototypes). Some great crowdfunding websites include GoFundMe, Kickstarter and Indiegogo. Successful companies that started on crowdfunding platforms include Oculus, Pebble, and SkyBell.
- Equity financing: Equity financing is probably the most known method of sourcing funds amongst start-ups which particularly occurs when issuing shares in exchange for capital. You have reached out to friends and family, angel investors (high net-worth individuals), small business investment companies, and/or venture capitalists. Their goal is to earn back a multiplied amount of their investment made in the company i.e. returns. Choosing an investor is crucial as they all have different return on investment goals and objectives. Furthermore, some investors may go further than just providing capital but also mentorship and networking possibilities as in the case of some angel investors and VCs.
3. Debt-based financing
Debt-based financing allows you to remain in control of your business and not answer to investors. As we are talking about increasing cash (and hopefully using it efficiently), debt financing is typically cheaper than equity financing as you owe only principal and interest while keeping your full stake in the company.
- Convertible notes: A convertible note is a form of short-term debt that converts into equity if a future equity round is raised. This conversion typically occurs at a discounted price per share of that future round. However, you can opt to either pay the investor back with their principal plus interest or you can pay them back with equity. This choice depends on whichever date comes first – the maturity date or the future round.
- Business lines of credit: The lines of credit open to your start-up are anything between a credit card, bank overdraft, and a business loan. One of the perks of using your lines of credit is that interest is only charged on the money used. In addition, business lines of credit are a great way to improve the company’s credit score. Lastly, interest payments are tax-deductible which helps ease some financial burdens. Lines of credit can also include working capital loans, accounts receivable financing, small business term loans, and Small Business Administration (SBA) loans.
4. Government Grants
Grants are a sum of money that the government gives to small businesses to use for very specific purposes and functions. The best part about government grants is that they do not have to be repaid. However, there is a caveat; to receive a grant, businesses need to meet very specific criteria to qualify.
There are pros and cons to every financing option, therefore, as a business owner, you have to carefully consider which option will suit your business goals. Furthermore, you need to ensure that you have an elaborate business plan to attract investors and/or convince lenders to loan you the necessary cash needed. Lastly, you need to be able to present your business in a way that builds interest in your idea and the problem you are trying to solve. All the best, securing your start-up funding!