- Emma Parker
- April 10, 2020
If you have an idea and tested how likely it is going to be successful, now is the time to put all your efforts into getting it off the ground. Well, the first thing you need to set off your venture is money. No matter how good the idea you have come up with is, you cannot step into the market without capital.
A business needs money for regular operations. There are a lot of activities like marketing, advertising, dealing with clients, handling staff, inventory for which you will need money. Of course, you must have some savings to fund your business, but that might not be enough to fund all your business expenses.
Your business cannot immediately generate profits, so you cannot afford to sit back. A business loan is an effective way to raise money, but you will need to prove your lender that your business is likely to generate profits so that you do not fall behind repayments.
Apart from savings and business loans, there are a few other options you can use to fund your start-up.
Friends and family
If you are not seeking a considerable amount of money, you can take help from your friends and family. As you know, business loans require you to pay the interest along with what you borrow. It can be more expensive than the money borrowed from your friends and family. They will surely not charge you interest.
If you are looking to borrow money from your friends and family, you need to ensure them you will return their money. You must have a plan to discuss with them so that they could believe that you need cash for your business only. If you convince them you can earn a significant amount of profits with their help, they will not mind lending you money. Agree so that they could trust you that you will pay back the money.
Another funding source available to you is angel investors. Such people invest in start-up companies. Angel investors invest their own money in a business and therefore look for a higher rate of return. The typical interest rate they may expect is 25% or more.
One of the significant benefits of investing in angel investors is it is not as riskier as debt financing because you do not have to pay back the money. However, it has a drawback that you will not have complete control over your business. Angel investors will act like shareholders. They will have a say how the business should be run.
Another way to raise funds for your start-up company is venture capitalists. The only difference between angel investors and venture capitalists are the former invests their own money, and the size of investment will be smaller than the one made by the latter. Venture capitalists expect more returns that can vary between 25% and 35%.
If you want to attract the attention of venture capitalists, you will need to prove the success rate of your business. Remember that venture capitalists have some control in your business. They may interrupt in the way you run your business. Whether you borrow money through angel investors or venture capitalists, you lose the freedom to run your business the way you want.
There are various methods of funding your start-up needs, but you need to analyse each funding method before taking the plunge. Make sure that you have analysed pros and cons. It seems right to see a large amount of cash coming in your business, but do not forget that you will have to pay the return and you may lose some control over your business.
Venture capitalists and angel investors are good options if you can afford to pay returns and do not have any problem with partial control. Otherwise, debt financing will be an ideal option. Take guidance from a financial expert if you cannot come down on one side of the fence or the other.