How to prepare your startup for funding and choose the better alternative, 6 ways to get financing for your business

How to prepare your startup for funding and choose the better alternative, 6 ways to get financing for your business

Let’s begin with some reality. Like so many other parts of running a business, much of corporate finance is determined by your unique situation. The truth varies depending on the stage of development, available resources, and other factors.

Are you a new business or a well-established one?

The possibility of obtaining money is strongly influenced by the company’s qualities.
Many established businesses, for example, may be able to acquire traditional business loans from a bank that are not available to startups.

Furthermore, high-tech, high-growth startups have access to funding that stable, established businesses with modest growth do not.

Create or improve your business strategy.

I’m not implying that you don’t need a business strategy. You must.
Your business plan is a vital piece of the fundraising puzzle because it describes how much money you’ll need, where it’ll go, and how long it’ll take you to repay your investment.

Investors will first look at a summary, then a pitch; however, if you make it that far, they will want to see a business plan being a part of the due diligence process. Even before that, in the early phases, they’ll want you to have a business strategy in the background for your usage.

Most commercial banks demand a business plan being a part of the loan application process. When qualifying for a Loan insured by the Small Business Administration, a business plan is required (SBA).

Everyone you talk with will expect you to be prepared with a business strategy. They may not ask to see your approach at the outset of their interactions with you, but don’t be surprised if they do.

Where can you get finance for your business?

The system of seeking money must be tailored to the company’s requirements. Where and how you hunt for money is determined by your organization and the type of money you need. For example, a high-growth internet-related startup seeking second-round Venture money and a small retail store seeking financing for a second location are importantly different.

We’ll look at six distinct sorts of investing and financing possibilities in the sections that follow. This should assist you in determining which Finance choices are realistic for your company and which investment opportunities to explore initially.

1. The use of Venture Capital

The venture capital business is widely seen as being misunderstood. Many startup companies bemoan the lack of Venture Capital firms to make an investment in more creative or risky ventures.

Venture capitalists are referred to be sharks or sheep depending on whether they are predatory in their business practices or think like a flock, all looking for the same opportunities.

This isn’t the case at all. Entrepreneurs who are entrusted with investing other people’s money are known by the term Venture Capitalists. They have a professional obligation to minimize risk to the greatest extent feasible. They should only take on only that much risk as is absolutely necessary to fulfill the risk/return ratio criteria of their Financing sources.

Who should Approach Venture Capitalists?

Only a small number of great new enterprises should use Venture Capital as a source of finance. They can’t afford to back startups unless they have a unique combination of product, market, and management experience.

Venture investors look for firms with the potential to increase significantly in value over the next several years. They recognize that the majority of these high-risk projects will fail. Therefore the winners must be compensated sufficiently to compensate all of the losers.

They generally focus on emerging products and markets that have the potential to grow revenues by huge multiples in a short period of time. They try to work with only established management teams who have worked with successful companies in the past.

You’re probably already aware of this if you’re thinking about investing in Venture Capital. You have folks on your management team who have gone through the process before. You may convince yourself and a group of educated people that your company can grow tenfold in three years.

If you have to wonder if your new business is a good candidate for Venture financing, it probably isn’t. People who work in emerging growth industries, Venture capital, and Venture Capital possibilities are familiar in fields like multimedia communications, biotechnology, and the furthest reaches of high-tech products.

2. Angel investment

Angel financing is importantly more widespread than Venture money, and it is often available to entities at a far earlier stage of development.

Although angel investment resembles venture capital (and is sometimes confused with it), there are important distinctions. Angel investors are, first and foremost, individuals or organizations who invest their own money.

Second, angel investors like to invest in businesses when they are still in the early stages of development. In contrast, venture capital wants to wait until startups have had a few years of development and have gained more expertise.

Businesses that receive venture capital frequently do so after they have received angel investment and have grown and matured. Angel investors, like venture capitalists, want to invest in high-growth businesses that are still in the early stages of development. Established, stable, low-growth businesses aren’t a good source of funding.

You should know that the JOBS Act of 2012, which loosened some laws and allowed what is now known by the term crowdfunding, had an influence on angel investment.

Traditionally, securities and exchange laws in the United States limited angel investment to those who satisfied specific minimum wealth requirements, referred to as “accredited investors” in legalese. Crowdfunding refers to individual investments in companies made by persons who do not meet the legal wealth standards.

Under certain conditions, startups and even non-high-growth small businesses might seek capital from a wider group of investors. Many of the nuances are still murky, so consult an experienced attorney if you’re unsure.

Where can you look for angel investors?

Of course, the next question is where to hunt for “angels” who could be willing to invest in your business. Certain government agencies, company development centers, business incubators, and other similar organizations will be linked to the investing communities in your area.

To begin, contact your local Small Business Development Center (SBDC), which is nearly typically connected to a community college.Your company proposal can be posted on platforms that connect angel investors. The two most well-known websites in this field are
-AngelList
-Gust Angel Network

If you engage someone to act like a front or negotiator for you, or to write your company plan, or to make your pitch presentations, etc., be wary of anybody or any business entity trying to source your startup money.

This is a shark-infested area.
Although I am aware of a few reputable business plan consulting businesses, trustworthy entities are harder to find than sharks. Rather than working with brokers, finders, or consultants, angel investors want to interact directly with the startup’s founders.

Finder’s fees were formerly common among entrepreneurs, but they’ve since become obsolete.

3. Commercial lenders

Banks are far less probable than venture capitalists to invest in or lend money to companies. They are, nevertheless, the most likely source of finance for established small businesses.

Small business owners and entrepreneurs are quick to criticize banks and financial institutions for their failure to fund new businesses. Banks are prohibited from investing in businesses, and their capacity to do so is restricted by federal banking regulations.

The government prohibits banks from owning businesses because society being a whole does not want banks to accept depositors’ money and invest it in risky business Ventures, putting bank depositors’ money at risk when (and if) those Ventures fail.

Do you want your bank to put money into new businesses? (apart from your own)
Furthermore, banks should not lend money to startup enterprises for many of the same reasons. According to federal regulations, banks must keep money safe by providing conservative loans backed by good collateral.

Bank authorities consider startups to be too risky, and they lack sufficient collateral.
So, why do I think banks are the most probable source of finance for small businesses? Because small business owners are reliant on banks for funding.

A few years in business have given a corporation enough stability and assets to function LIKE collateral. Banks frequently lend to small businesses using the company’s inventory or accounts receivable in place of collateral.

Normally, calculations are used to assess how much can be borrowed based on inventories and Account Receivables.

A major amount of small business finance comes from bank Loans secured by the firm owner’s personal assets, like real estate. According to some, the most prevalent source of small business capital is home equity.

4. The Small Business Administration (SBA)

Small businesses, especially startups, can get Loan guarantees from the Small Business Administration (SBA). The Small Business Administration does not provide loans; instead, it guarantees them so that commercial banks may make them safely.

Typically, local banks are the ones that apply for and handle them. You will find most probable to engage with a local bank when applying for an SBA Loan.

The SBA usually demands that the new business owner furnish at least one-third of the required cash when applying for a startup loan. Furthermore, a sufficient amount of business or personal assets must be used to back up the remaining monies.

The Small Business Administration works with banks that are “certified lenders.” The SBA can approve a Loan in as little as one week for a licensed lender. If your bank isn’t a certified lender, contact your banker for a referral to a nearby bank that is.

5. Alternative lenders

Aside from traditional bank loans, an established small firm can borrow against its accounts receivables from accounts receivable experts.

When working capital is tied up in accounts receivable, the most frequent accounts receivable financing is employed to sustain cash flow.

If your business sells to wholesalers that require 60-day payment terms and you owe $100,000 in outstanding invoices, you’ll almost probably be able to borrow more than $50,000.

Despite the high-interest rates and fees, this is a valuable source of capital for small enterprises. In most cases, the lender will not take the risk of nonpayment—you must refund the money regardless of whether or not your customer pays you. These lenders will typically evaluate your debtors and decide whether or not to finance part or all of your past-due invoices.

Factoring is another commercial practice that is related to factoring. Factors purchase responsibilities, so if a customer owes you $100,000, you can sell the paperwork related to the debt to the factor for a fraction of the total amount owing to you.

The discounts are obviously rather considerable because the factor accepts the risk of payment in this circumstance. Contact your bank for more information about factoring.

6. Funding from friends and relatives

If only one piece of advice could be given to budding entrepreneurs , it would be to figure out how much money you need and that it is in peril. Know how much you’re betting, and never put more money on the table than you can afford to lose.

I’ll never forget a conversation I had with a man who had tried for 15 years to make his yacht manufacturing firm succeed, only to end up with nothing except aging and more debt. “If there’s one thing I can tell you,” he continued, “it’s that you should never accept money from friends and relatives”an expert stated.

You will never be able to escape if you do so. You must be able to shut down and walk away from a failing business.
You’ll never be able to go out if you do. You must be able to shut down and walk away from a failing business. That was something not everyone is capable of.

The story outlines why securities restrictions in the United States hinder non-wealthy, well-informed individuals from participating in firms. They have no idea how serious the situation is.

By investing in your company, your parents, siblings, excellent friends, relatives, and in-laws have offered you a great compliment. Please make sure you understand how easily this money might be lost in such a situation and that they know as well.

Although you should not rule out raising finances from friends and family, you should be aware of some of the disadvantages. The best way to approach this relationship is with your eyes wide open.

Perhaps your position and concept are better suited to crowdfunding, which is creating a profile and submitting your company’s idea or product to a website such as Kickstarter. Indeed, crowdfunding has become so popular that there are now dozens of sites to choose from, each with its unique set of terms and benefits.

When starting a business, most people use their home equity or savings to fund it. This is known as “bootstrapping.” Only a few high-growth firms are able to secure outside funding. Deals involving venture money are exceedingly unusual.

Borrowing will always be based on collateral and guarantees, not business strategy or philosophies. While business borrowing is prevalent among existing businesses, it is not a frequent option for new businesses.

What you should do next is very dependent on your specific company. In general, high-tech startups should seek angel capital or approaching friends and family for help initially, whereas established businesses should first seek small business banks. However, bear in mind that your business is unique.