What Are the Top Four Ways to Finance Your Startup Business?
Starting a business is an exhilarating, high-energy endeavor. With any startup, the funding and finance function of the startup requires sufficient attention from the get-go. Financing decisions can be the difference between the success or failure of your startup.
Every startup business has a different set of financial needs. The initial business plan will include a startup budget. Knowing how much money is needed is a first step. Once the budget is set, it’s go-time for accessing the initial startup funds. AB Financial Group is prepared to help with your startup financial funding requirements.
1. Self Funding
The most immediate strategy to get a start-up launched is to tap into your own available resources.
Savings – Turning to the monies that have been set aside for growth, including simple savings accounts and tax sheltered instruments such as a 401k plan, can be a logical starting place. Understanding how to access the funds, and the impact of using these resources are important considerations moving forward. Savings balances may be used to leverage bank loans, or be drawn down to meet the startup initial needs. AB Financial Group is ready to guide you in the decision process for tapping personal savings.
Credit cards – Like tapping savings, the use of credit cards for business startup expenses squarely places the financial risk on the founder’s shoulders. A credit card is convenient, but should be weighed against the cost. Interest rate charges become an immediate liability to the startup. Other important factors include the credit card’s rewards program, benefits, yearly fee, introductory and annual APR for transfers, purchases and, most importantly, the cost of advances, which tend to be very high.
Invoice funding – A startup may choose to use its invoiced accounts receivable to generate credit from a lender. A customer invoice, due at the end of a given term, is “sold” to the lender for a fee, and the balance is issued to the business. This can be done without a customer’s knowledge, and is a great way to bolster cash flow for overhead and business growth.
2. Close Circle Funding
Financing with a close circle can involve all of the people closest to you, i.e., friends, family, business associates and partners who align with your vision.
Friends and family – In addition to putting one’s own money into the startup, consider family members and close friends who may support your startup vision and agree to put seed money forward. This may result in more favorable borrowing terms, assuming it is a loan, not a gift. Weigh the eventualities. If the startup is a success, determine the agreed pay-off timeline. If the startup does not survive, what plan is in place to resolve the loan issues, while maintaining the important family and friendship relationship.
Find a partner – Align with a like-minded business partner, and create a symbiotic, financially positive relationship. This can provide a stable source of funding for a startup. It can often be with a larger business that benefits from your product. The benefit to the partner is exclusive or priority access to your product, and some form of agreed upon return, such as equity or royalties tied to your deliverables.
3. Community Funding
Many resources are available in the community to get the financing needed for your startup business. This includes:
Crowdfunding – This community based funding source includes built-in fun for the given community. In exchange for a gift to the startup, often inspired by your “great idea,” a crowdfunder does not expect a monetary return, but rather is repaid by a special “gift” expected from the startup. This type of remuneration can be free product, acknowledgment of the crowdfunder’s participation, company swag, access to founders for personal or professional networking, participation in company events, etc. This is an attractive return for creatives who thrive in the startup environment, and like-minded entrepreneurs who value innovation.
Venture capital – Typically, this is an association of investors which selects opportunities in the form of innovative ideas and companies that display a projection for substantial growth, along with potential for a leading competitive edge. Partial ownership in the startup is usually the compensation for venture capital financing, and a seat on the board of the startup is usual. Along with the financing, the startup can also benefit from the relationship with the association. Often the venture capitalist can offer intellectual capital to the startup as well, due to the fact that these investors are often industry leaders who can provide a wealth of knowledge, a comprehensive growth network and a deep understanding of the market.
Angel investors – Most angel investors are cash rich such that they choose to finance startups with potential to generate a higher rate of return than traditional investments.They can offer favorable terms compared to traditional borrowing, and offer more informal financing, compared to venture capitalists. They are usually more interested in the founder, the project, and the evolution of the great idea from vision to reality. The terms can range from gift status to ownership and every possibility in between. Convertible debt is one type of angel investment instrument, which turns the startup investment into company shares, at an agreed upon time in the growth of the startup. As with the venture capitalist, the angel investor can often provide intellectual as well as financial capital to the startup
4. Traditional Funding
Turning to traditional funding for your startup business can be an excellent choice considering the options available. Some of these include:
Business loan – Traditional lenders such as banks and credit unions generate business loans which are considered debt and are repaid with interest. This is available for both startups and long standing concerns. Loans may require collateral (secured loan) or not, which affects the terms, and may be forfeited if the loan goes into default. Also, there are alternate finance providers who cater to smaller businesses including startups.The loan application process is rigorous and challenging for a startup. Whereas there is a history of accounting and balance sheets found within a long-standing business, the startup is considered on the strength of its business plan, other sources of funding and collateral. Business loan decisions are based on multiple factors including macro and micro economic conditions, risk, projected performance, and local, state and federal regulation. AB Financial Group has the financial expertise to support the decision and process of securing a business loan for a startup.
Line of credit – With many of the same requirements and parameters of the business loan, the business line of credit has a rigorous application process, with traditional terms to repay the debt with interest. The benefit of the line of credit is the flexibility to use the funds on an as-needed basis, thus minimizing the size of the debt, and its impact on company cash flow.
Small Business Administration (SBA) funding programs – The Small Business Administration operates as an alternative to open market lenders for small businesses that need assistance in securing startup financing. The SBA provides a range of tools for startup funding, including:
- SBA guaranteed loans – take the backing of the Small Business Administration to the bank. This guarantee relieves much of the risk to the lender and opens the source of funding for the startup.
- SBA Investment program – much like the venture capitalist and angel investors in the open market, the Small Business Investment program provides the startup business access to its licensed and regulated investment groups
- SBA Innovation Research program – this program has an eye on federal funding and grants that meet its requirements for high potential and commercialization. There is support for the research side of the endeavor, as needed.
- SBA Microloan Program – with a ceiling of $50,000, this program offers opportunity for a startup to gain initial financing to get the ball rolling.
Rely on AB Financial Group to provide the guidance and expertise you require to secure the most nimble, powerful and cost-conscious financing to get your new business started. Contact AB Financial Group today!