There are many financing models available to you that will ensure enough funding for your business. The key is determining which model is ideal for your business so that you can make the best decision.
Starting a business is a much more challenging task than most entrepreneurs realize at first. Aside from initial planning, testing, and funding via the appropriate financing model, you have to sustain your business until it starts generating revenue and profits. This period can be daunting, especially since you have to support every business operation out of your own pocket.
Be that as it may, 29% of all startups fail because they ran out of cash. Financing a business is more difficult than it meets the eye. However, a good thing is that you can always find an alternative financing model for your business, if you’re willing to make an effort, of course.
Every model has its own unique advantages and disadvantages, so make sure you analyze each and everyone thoroughly before you decide which one to opt for. In addition, just because a financing model exists, it doesn’t mean you’ll be able to secure funds through that option straight away or at all. Simply put, you’ll need the right approach for every model. With that in mind, here are a few ways you can choose the right financing model for your startup.
Borrowing from friends and family
One of the simplest finance models with the least strings attached is borrowing from family and friends. Many entrepreneurs opt for this method because it’s the most reliable one. The main reason is that friends and family tend to be more flexible when it comes to lending you the money and for paying them back, of course. However, every method can be stretched only so far before issues arise.
The first problem you may have to deal with is determining when you’ll be able to pay back the money you’ve borrowed. Also, financing a startup may require a lot of funds, which indicates that your friends or family members may not have that much to lend you in the first place. Therefore, this option is more suitable for entrepreneurs who don’t need much to borrow and who need to borrow for a short-term period only.
Borrowing money from financial institutions and lenders is the next step in choosing a financing model for your startup. There are several options available to you when it comes to business loans, such as banks, government grants, alternative lenders and so on. Each lender requires a proper approach from your side if you want to get approved, you can find out a lot about preparing to become a financial fit here.
As an example, bank loans tend to be quite tricky as many banks want to have a peek at your credit score and ask for collateral. On the other hand, alternative lenders tend to be more flexible on the matter but may not lend you too much for too long. Lastly, government grants apply to businesses that are more focused on research and development and not on making profits. Each lender has their own set of rules and requirements you must fulfill before you get approved for a loan.
As a startup owner, you have an opportunity to choose investor aid as a financing model for your business. There are two major models, angel and venture capital investments, with each having its unique advantages and disadvantages. What both investors have in common is that they require from you to provide them with proof that your business can succeed and become profitable in due time.
You need to prepare a detailed business plan, financial projections and strategies for managing a business in both good and bad times, among other things. The main difference, however, is that both investors have different agendas. For instance, angel investors support entrepreneurs who are passionate about their business and are not in the get-rich-or-die-trying mindset.
In return for their support, they ask for at least a 25% ROI. On the other hand, venture capitalists are more straightforward. They support businesses that can become profitable in three to five years and in return for their support, they ask for shares of your company, essentially making them major stakeholders of your company. Companies, such as Facebook and Google are examples of businesses that took venture capital aid.
One of the newest and most popular financing models for startups is crowdfunding. Many entrepreneurs decide to go straight to the source, i.e. their target audience and ask for financial support instead of bothering with investors or banks.
If your audience or “the crowd” likes your idea, they will contribute to the cause and endorse it further. The way it works is that you opt for one of the many crowdfunding platforms, such as Kickstarter, GoFundMe, Indiegogo and many others. You pick a time period and a funding goal and the audience donates until the goal is reached during that time period.
However, some platforms won’t let you keep the funds unless the goal is reached and you must choose carefully which platform to opt for. You may not be able to get a lot of funding and the audience response may not be as generous as you hoped it to be. Therefore, use this model only if you’re absolutely certain that you can ensure the crowd’s support.
Startup businesses require a lot of funding before they can sustain themselves financially. The majority of entrepreneurs don’t have such a large initial capital, to begin with. Fortunately, there are many financing models available to you that will not only ensure enough funding for your business but also guarantee you won’t have any financial issues to worry about. The key is determining which model is ideal for your business so that you can make the best decision.