Only 30% small businesses manage to get bank loans on the
strength of documentation. Although the difficulties are real it is not
insurmountable.
Luckily there are many ways to source startup funds for
your business. Here are a few ways to acquire startup funding.
Top Sources for Startup Funding
- Personal loans and credit
- Family and friends
- Venture capital
- Angel investors
- Banks
- Crowd funding
Make
a Budget
Before seeking loans you need to write a business plan
and make a budget. The budget should focus on capital costs, operational costs
and contingency money.
Operational costs are recurrent expenses such as office
supplies, advertisement, staff wages, rent and insurance. You can set aside 9%
for contingency, while capital costs are fixed assets and equipment.
Bank
Loans
There are different types of bank loans that fall under
two categories, secured and unsecured loans. Unsecured loans are drawn on the borrower’s
assets.
Unsecured loans include bank overdrafts, personal loans,
and peer-to peer lending. Others are credit card, debt cards, lines of credit
and corporate bonds.
Secured loans are pledge loan and mortgage loans. Secured
bank loans are the primary way company’s secure funding for their business. The
loans are usually short termed or long termed.
Short termed loans attract higher interest than long
termed loans. The repayment terms depends on the loan facility and duration.
To secure bank loans you need collateral such as landed
property or a building. Other requirements are proof of competence and
profitability.
Banks are usually concerned about getting their money
back so they scrutinize the purpose for loan. Other requirements include
business plan, guarantors, some startup funds and an account in the same bank.
The account is to make sure of proper accountability and
fund remittance. The loans given by banks have either flexible or fixed
interest rates.
You will pay more if an insurance package is included in
the loan. Before taking the facility make sure you thoroughly scrutinize the loan
conditions.
Related How to Write a Business Plan
Venture
Capitalists
Venture capitalists have collective funds and are eager
to invest in any profitable venture. They carry out their own due diligence
before partnering with a small business owner.
The investors might require a part share of your company.
While some base their investment on profit taking. Usually such investors
prefer sponsoring startups aligned with their technical/business preferences.
Crown
Funding
Crowd funding uses the financial strength of the
collective to fund a project. Crowd funding have become popular via internet
mediated registries.
The initiator or small business applies for funds while
groups/individuals provide the funding. The funds are usually monitored by a
third party mediator.
The funds are available to small business, social
services and community based programs. There are two types of crowd fund the
reward based funding and equity funding.
Reward based funding focuses on project returns while
equity funding requires equity in the startup company. The benefits of crowd
funding are reduced costs, increased investment and value to new investors.
The disadvantages to such investors include failure of
company, donor exhaustion, abuse of process and poor due diligence.
Related
Post: How to Raise Capital Through Crowd Funding
Angel
Investor
Angel investors are usually retired entrepreneurs or top
executives. An angle investor’s interest in a venture is not purely monetary
and includes mentoring, networking and advice.
This informal lending platform is financed through angel
fund raisers, private investor’s angel networks or groups. The investment is
usually in exchange for equity, part ownership and convertible debts.
Angel investor uses their own funds to finance the
project and bare extremely high risks. Due to the level of risk they may
require very high returns on investment.
Bootstrapping
Bootstrapping is when a person uses personal finances to
start a company. Many company’s get started with little investment or
collateral.
They solely rely on personal savings, turnover and lean
operations. By not depending on external sources you tend to keep 100% of your
equity.
Bootstrapping can be achieved through target funding and
regular savings. Some individuals even result to selling the little property to
raise funds. The downside to bootstrapping is slow growth and serious financial
constraints.
Borrow
From Friends and Family
Many entrepreneur source startup funding from family
members. They add to their savings by borrowing from friends and family.
Make sure your business model is sound and practical.
Although your family is sympathetic to your cause don’t take them for granted.
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