There are many sources of finance for new businesses, but not all of them are the best fit for every business. Therefore, it is essential to do your research and understand which sources are available to you and the most beneficial for your particular venture. Here is a list of six top sources of finance for new businesses.
Crowd Funding Finance for a New Business
Crowdfunding is a relatively new source of finance that involves pooling together small amounts of money from a group or “crowd” to finance something. This can be used for all sorts of things, including starting a new business, but it has particularly become popular in recent years with the rise in startups. People like this source of finance because it also helps them get connections and advice from mentors who have been successful in the industry.
For the purposes of this article, we will use Kickstarter.com to explain how crowdfunding works. Kickstarter is an online platform that uses crowdfunding to help new startups get off the ground. The business itself only makes money if it gets fully funded by enough people who are mainly looking for a “reward” in return for their money. If the project isn’t fully funded, nobody gets charged, and the business has to think of another way to get cash.
The CrowdFunding Process
Crowdfunding can be used for all sorts of things but usually revolves around getting people to sign-up (usually through an online platform or website) in return for a “reward.” This reward can be anything from a thank you email, to a free product or service, to unique benefits associated with the project. In terms of its uses for new businesses, crowdfunding offers an excellent way for them to raise initial capital and connect with potential customers and mentors who have been successful in their respective industries.
There are other ways to use this type of finance, such as peer-to-peer lending, where a business gives a certain percentage of its cash flows to a crowd lender. This is a potentially attractive option for companies that have been trading for some time and can give out financial forecasts with some degree of accuracy.
The Pros and Cons
Crowdfunding is an excellent option for new businesses, startups and projects where the initial costs are relatively low. For example, Kickstarter requires you to have an all or nothing target of $1,000. If you need more money, you can go with another crowdfunding platform with higher targets and charges more in fees. However, this is probably a small price to pay for a potentially large amount of interest and support from a crowd.
As with any form of finance, there are some drawbacks regarding crowdfunding. First is the sheer number of platforms you have to go through to get funded. This not only takes up your time but also increases the associated costs (although this will vary from platform to platform). Also, not everybody who contributes will want the same thing as you. If you’re lucky, investors may offer great advice and support, but there is no guarantee that they will be interested in your product or service, which could lead to problems further down the line if it doesn’t perform as well as expected.
Debt as Finance for a New Business
Debt is one of the oldest forms of finance and involves borrowing money from a bank, credit union or other lenders to start a business. It can be secured on assets such as property, vehicles or other valuables. While debt is a quick and straightforward way to get funding for starting a business, it may carry high-interest rates, and you need to be aware of the repayment schedule. In addition, if you fail to meet repayment obligations, the lender has the right to seize your assets.
Debt is therefore useful only for short term activities or projects that are certain to have a positive return. In addition, it may be difficult for debt to cover operating expenses, particularly if you are still developing your business and not generating any income. Debt can be part of a more sustainable funding plan but cannot by itself finance the needs of a new business.
Debt is not appropriate for everyone. It may be not easy to repay the money owed, mainly if your business plan doesn’t work out as expected. Your business may also not qualify for debt funding, or you may simply not want to assume the additional risk of high-interest debts. Below are some of the pros and cons of using debt financing:
· As a startup, debt is a quick and easy way to get funding for your business
· Debt financing is good for short-term needs
· High-interest rates on loans contribute to high risk
· In order to be eligible for debt funding, you need to have collateral
· If you fail to make debt payments, creditors can seize your assets
· Debt repayment is not tax-deductible
3. Equity financing as finance for a New Business
Take an equity share in your venture, which entitles investors to a percent of the company’s profits. This type of finance is most often used in startups where the business is not yet profitable. Equity financing means giving up part of the company so investors get an interest in it and there are more opportunities to be successful with your venture. The lack of control regarding the use of funds is often perceived as a disadvantage. The money will have to be repaid the investors with interest, after which they likely will sell their share at profit, but can also take part in future profits. The typical equity financing agreement contains restrictions on how much money can be left reinvested and what percentage of revenues must be paid. If the company’s value increases after the equity financing, this can often be an additional bonus for both parties involved in the venture.
The cost of equity financing is a common major objection to this type of finance. Assuming the company survives the initial years, the investor may get an interest in your venture’s returns. Equity financing can often provide you with enough capital to start up or even buy another business, but if not it will still be used for expansion. There are three types of equity financing transactions:
An additional advantage for the entrepreneur is that if the business fails, the investor loses his investment. If you are looking to get involved with an equity financing agreement, you can look in various places like The Business Finance Lab or their page on Equity Financing Agreements (pages.stern.nyu.edu/bf/advice.html) .
Government Grants as Finance for a New Business
Grants are free money sources that will enable you to achieve your goals without having to pay it back or give up a share in your business. Grants are normally provided by public bodies and involve applications where you have to prove that your venture will have positive social or environmental impacts. Also, there are grants that will fund your business if you have a mission to improve the competitiveness of small and medium-sized enterprises or if you want to increase issues related to employment.
Whether you are starting an online training consultancy, are expanding your grocery store chain or are opening up a new café, here are four ways to get government grants for your project.
- Training Grants for Startups
If you are a young ambitious business person and have just started up, you can apply for a training grant from your regional authority to help you build the necessary skills for growing your business. Normally, grants in this area provide funding towards staff training, which will make sure that all employees in your business have the necessary skills to deal with customers properly.
2. Marketing or Sales Training Grants
If you are looking for a grant, another option is to apply for a marketing and sales training program in your region. These courses will help you develop your business marketing strategies and enable you to create an effective online presence of your business on the Internet.
3. Research and Development Grants
Businesses that have just started up are not always required to have a fully-fledged business plan to get research and development grants for their projects. However, you should consider writing a detailed business plan if you want your application to be more likely to be successful. Also, some regions will request that specific percentages of your employees have postgraduate degrees, which will make it easier to apply for a research and development grant.
4. Grants for Expanding your Business
If you want to expand your business, especially if you want to open up a new branch in another region or county, make sure that this is something that fits well with the goals of the local authorities. You can also apply for multi-purpose grants for the expansion of your business, if you want to open up several branches in different locations within a short time period.
5. Bootstrapping without Finance for a New Business
Bootstrapping is the internal finance of a business where there is no investment from outside sources. This involves generating funds internally through reinvesting profits, selling shares or borrowing from the founders. This is a good option for startups as it means you don’t have to spend time looking for investors and there are no outside pressures on how you run your business. It is also a good way to test the real viability of your business – do you have what it takes to make it work? There are also some costs associated with bootstrapping, but this is usually outweighed by not having investors breathing down your neck.
Here are 5 ways to successfully bootstrap a new startup:
1) Courage and creativity: It takes courage to start a business. You will be stepping into the unknown and you may take some terrible falls along the way, but the rewards are worth it. Creativity is also an essential element in bootstrapping as it helps with problem solving. The ability to think outside the box is key here – remember that there are no limits to how you run your business.
2) Keeping expenses low: One of the main issues with bootstrapping is that you have to keep your expenses low, but this isn’t always possible. You may have fixed costs that are unavoidable, but it’s important to see what variances in expenditure there are and plan accordingly where possible. You can also save money by moving to cheaper premises or using free/low cost alternatives.
3) Earning the trust of suppliers: Suppliers are willing to offer you better deals if they believe your business is here for the long term and will continue to buy from them. Work on getting good relationships with your suppliers – don’t be too demanding and make sure you pay them on time. This will help to get better deals in the future.
4) Maximising revenue: There are certain things that cost nothing but can actually earn you money – essentially free advertising or an easy way of boosting your business income through alternative means. One example is offering complementary products/services with the main service that you charge for. Developing a website and social media channels is also quick, easy and free – these can have a big impact on your business.
5) Use crowdfunding: Crowdfunding platforms such as Kickstarter allow people to share their projects with other users who can fund their project by making pledges. This allows you to reach out to potential customers in an innovative way.
6. Business Loans as Finance for a New Business
Business loans are another form of debt finance where you borrow money in the hope that the venture will generate enough profit to repay the loan. There are two basic types of business loans: unsecured and secured. Unsecured loans do not require any collateral, whereas secured loans typically need to be backed by something like property or other valuables.
Unsecured business loans are usually cheaper than secured loans, but they still need to be repaid whether or not your new business is successful. Secured loans usually have lower interest rates, but you risk losing the asset if the venture fails.
As with other debt financing options, debt can also effectively bridge cash flow problems. The main downside of unsecured business loans is that they do not allow the borrower to retain the asset if a new venture fails, and he or she defaults on repayment.
A major advantage of this option is that it allows you to continue working with the same asset – you don’t have to sell your house or car – but you will have to repay the loan even if your business fails.
A large number of peer-to-peer lenders are also willing to lend money for new startups, including Lending Club and Funding Circle.
Conclusion
As you can see there are many different sources of fFinancefor starting a new business, but not all of them are suitable for every startup. However, it is not only the type of finance that matters, but also how you go about obtaining it and even more importantly what your business does with it. The six sources listed here will give you a good starting point when deciding on your new venture’s financing and in which order to pursue these.
Remember that there is no one-size-fits-all approach to raising startup funds, so do your homework and try to figure out which option works best for your company.