One of the main challenges every entrepreneur faces at the beginning of their career is finances. More specifically, finances required to launch and successfully run a startup business. The fact of the matter is that 29% of all startups ultimately fail because their owners ran out of funds. In other words, you must have enough capital to sustain your business until it can sustain itself with profits and revenue.
However, what happens if you don’t have enough money for such an endeavor? Should you simply give up then? As a matter of fact, you don’t have to give up at all. Many business owners decide to opt for a financing model that will help them fund their startups. A financing model is a way to secure funds for business operations from sources other than your own budget. With that in mind, here are a few ways to choose the right financing model for launching a startup.
Table of Contents
The concept of crowdfunding has emerged only recently and it has become very popular ever since then. Many businesses decide for a crowdfunding financing model because you appeal directly to your target audience for financial support.
You can’t expect from the crowd to fund your entire business but this solution is ideally suited when developing new products or services. If your audience likes what you suggest, they’ll donate money towards a specific goal. Goals are set on crowdfunding platforms such as Kickstarter, GoFundMe, Indiegogo and others. If you reach the goal by the pre-specified time limit, you get to keep the funds. Otherwise, the project is deemed failed and you don’t get to keep what’s been donated.
Another financing model is investor support. There are two major options here: angel investors and venture capital. How you perceive yourself as an entrepreneur as well as how you perceive your business determine which of these investors will aid you.
For instance, angel investors support business owners who are passionate about their business and aren’t looking to get rich fast. On the other hand, venture capitalists support opportunistic entrepreneurs who can ensure that their business can become very profitable in three to five years tops. In exchange for their support, angel investors will require at least 25% ROI while venture capitalists will require shares of your company.
It’s no secret that many entrepreneurs would prefer to avoid banks as a source of financing. The main reason is that banks tend to be very picky when it comes to business loans. If you have a bad credit score, a bank may deny you a loan altogether or charge you with an unnecessarily high interest rate.
That’s why entrepreneurs opt for alternative lenders as a financing model. A good example of this is trade finance for supporting startups that are focused on international trade. In any event, alternative lenders provide better loan conditions and payoff terms than banks and they also won’t shun you for having a not-so-perfect credit history.
Bootstrapping and borrowing from friends or family
One of the financing models a lot of entrepreneurs opt for nowadays is bootstrapping. It’s the safest model liability-wise and there are no strings attached. What it means is that entrepreneurs only channel the funds they have into their business. That oftentimes includes tapping into your savings account and getting a job aside from developing your startup.
Everything you earn goes into financing your startup business. Another safer model is borrowing from friends and family. As you’ve guessed, instead of going to the investors, banks or lenders, you turn to the people you know and trust. Paying them back comes with a bit more understanding and far lower interest rates compared to bank loans and the amount of paperwork you have to file alongside a loan application.
Funding a startup business may oftentimes become impossible without a financing model. Every model has its unique advantages and disadvantages. That’s why it’s very important to choose wisely and consider every option available to you.