Startup Financing for the for a Startup Business
Many times, we see there are entrepreneurial ideas that never see the light of the day for want of appropriate monetary resource. Startup financing indeed is one of the eight biggest challenges that an entrepreneur faces while setting up business. For a first time entrepreneur, this challenge escalates even further as they have to look for funding sources as well as ways to network with potential investors and convince them about their story as well.
Startup financing does not come easy and often creating the funding avenues and opportunities for an idea to take off takes the maximum possible time. In fact, we often realize that the initial amount required to give shape to an entrepreneurial idea is often the most challenging bit.
A big factor for it could be the fact that you are just starting out and not many people might be knowing you or having any idea about your potential. Even for that matter for established entrepreneurs too who want to start out on a new business, the challenge is about convincing the potential investors or the trusted investors of the potential of the new service or product that they are planning to launch.
Most times what really comes to play are your personal and cherished assets be it the house you live in or the car you drive, credit cards, 401(k) reserves, loans from loved ones, friends and family and at times, mortgaging even the family jewels to generate the first flush of absolute investment you require.
Given the risks involved most times outside investors are not too keen about committing any money at this initial phase. Needless to mention that it is for this reason that this is a critical phase and in dire situations, entrepreneurs even run the risk of bankruptcy, depletion of family wealth and at times, soured relationships with loved ones.
The question is how we deal with a situation of this stature without absolutely resorting to begging or being totally directed by an outside investor who begins calling the shots by virtue of being the person who has invested heavily in a specific business. That situation, however, has its pros and cons and most importantly entrepreneurs begin to lose control over the idea that’s their brainchild and its effective execution that they might have planned for.
Some experts feel that one easy solution to deal with the situation would be to start it off on your own but to then look at an outside investor to kind of give it a push and nudge the business ahead. Bootstrapping the business and cutting down the gestation period is given as another solution. Creating a strong business plan is another key option as per many.
But the problem is there is no universal solution. Each business given its individual nature and line-up has different elements and challenges that need to be addressed on a case by case basis and it would be wrong to assume that you could have a single solution to all problems.
The Merit of a Business Plan
That said the merit of a business plan is the number one priority for any entrepreneur. They might have a great idea but transforming it into an effective business is crucial. One key element that can help you achieve this goal is keeping a strong business plan in place. A business plan is essentially a comprehensive and detailed accounting of the complete idea and the various associated elements that go with it in a way that the core concept gets highlighted in all possible manners without in any way inconveniencing the outcome that is expected from a given concept.
Another advantage of a strong business plan is the fact that it creates a tangible and lasting impression even when an entrepreneur is pitching the idea to an investor. A strong business plan will always convey the entrepreneur’s commitment and conviction to the overall idea and thereby goes a long way in improving chances of a business getting funded. It always represents the entrepreneur’s idea a lot more effectively rather than simply talking about a concept without any documentation on pen and paper.
Documenting and creating a business plan often spells out the funding requirement a lot more precisely. Entrepreneurs can estimate approximate funding in a step by step fashion and ascertain the kind of money required to completely execute the plan as they might have conceptualized.
Putting it on paper ensures that absolute details are accounted for and often that is instrumental in creating a more realizable cost estimate and deciding on the future course of action a lot more efficiently than otherwise. Sometimes in the excitement of going ahead with an idea, entrepreneurs lose track of the core details and often miss out essential expenses that might come to play.
Seeking Out Entrepreneurship Advice Programs
In this context, entrepreneurs can greatly benefit from advice programs that help them in putting their plan on paper and estimating the finances in proper perspective. Often these programs act as enablers designed to address the entrepreneur’s actual need and the understanding required to properly incorporate the funding challenges associated with starting a new business.
These types of advice programs are also instrumental in creating a more realistic estimate as there are some elements of running a business that need absolute precision and comes only through experience which is limited for a first timer.
Another importance of this entrepreneurship program in terms of startup financing is that an entrepreneur gets a firsthand experience in the way they must go about allocating their finances and computing it appropriately. What happens in the process is that they understand how and in what way must they look at putting together the financial requirements and costing aspects of a business.
This is of extreme importance as most times start-ups are a brainchild of individuals with no or limited experience in running a business and the realities are very different from a salaried job.
The Right Mix of Capital
With all the preparatory work in place, the next challenge is to go about organizing the finances for your company. First and foremost, once you are done with all the computing and planning, ask yourself the amount of capital you require. It always makes sense to set a realistic target for it. Remember the number of businesses that fail because they are undercapitalized is way too many. Therefore it is always better to err on the side of caution and account for a little extra. When you are starting a new business a little extra never hurts but a little less pinches severely.
Therefore right at the onset, it is a good idea to set a couple of pointers for yourself. You must ask yourself
- The actual money that you think, the business requires for being successful
- Estimate the amount that you can organize on your own through savings and personal assets
- The kind of personal assets that you might already have that you can use in the current business including office space, furniture etc
- Your personal credit rating and its possible impact on generating cash for the business
- Prospect of potential partners who might be willing to invest in your idea and also ready to share the losses.
Once this bit is done, the next challenge that will surely overwhelm you what is the type of funding and source of funding that you must look for? Do you need to focus on just one channel of funding or do you need to diversify? If you diversify, what all sources you must fall back on? Well, we believe that it is always a good idea to get an appropriate mix of alternative finding sources for generating the maximum amount and at most reasonable cost.
The Percent of Your Personal Savings as Investment
Personal savings are no doubt the most reliable and the first source startup financing. As a newcomer in the world of enterprises, an entrepreneur should look at funding at least 25-50% of the total business requirement through your personal savings. Not only does it bring down the relative percent of uncertainty in your business but also in many ways, it sends a strong message to your potential investors.
They show the extent of risk that you are ready to take up on your own to ensure that business achieves a relative amount of success. In case you are applying for small business loans, personal savings is also a key requirement for the loan to be processed eventually. Not only at the initial phase, it is always a good idea to keep the average basic level of personal funding to at least 25% if not more.
Look At Equity Investment Destination
By equity, we essentially understand providing a certain extent of funding in return to some kind of ownership in the business. The investor in most cases gets a stake in the business in exchange means ownership. That, therefore, puts a key question about the actual extent of ownership or stake you are ready to give up in exchange for the money you are getting.
Don’t be too buoyed by the immediate need and always keep the long-term consequences in perspective. For example, in the heat of negotiation, if you agree to give an investor 51% or more share in the exchange for the entire amount you are funding, you must realize that you are losing control of the very firm you are looking to start.
Therefore, it is very important that you take into account the various legal provisions and formalities before deciding on a stake. Whether this equity investment is from outside investors, friends, relatives or business partners, It is much better to always put stake related negotiation on paper and ensure all provisions are well covered. This will ensure that you do not have to lose control or say in your own company at a later date for lack of inadequate formalities and provisions in place.
What Are The Debt Financing Options?
The next destination that a potential entrepreneur has to look at in terms of garnering funds is the various debt funding options.
This is one of the most common and sought after form of startup financing. Not only because you can get some Government grants for free and do not have to pay back but also the relative risk is much limited in the ones that are given as loans. However, only problem with this type of funding is that the number of grants available is very few and they are only available for specific industries or group of investors.
The problem with this type of funding is often that they are targeted to bring a specific type or kind of entrepreneurs at par. The application process for these, as a result, varies from program to program and so does the specific necessities.
Long-term Commercial Loans
This is one of the most common forms of loans that entrepreneurs turn to for funding their startups. Normally these types of loans are associated with acquiring fixed assets or funding larger expenses. They could deal with buying any type of property or vehicles or even commissioning machinery that needs to be used. These types of loans are in general secured by the personal guarantee, assets or other forms of fixed collaterals.
The duration of these loans is way smaller and most times are for less than a year. These could involve anything from credit cards to revolving credit lines and invariably carry a relatively higher rate of interest. These type of loans invariably are used to deal with daily financial expenses, payrolls and any type of an emergency that the entrepreneur faces and has to look at resolving it immediately.
Ways To get Your Loans Approved
We all know that just knowing the various forms of loans available is not sufficient for an entrepreneur to garner funds. Most times the biggest challenge is to convince the loan provider about an entrepreneur’s eligibility to get that loan. So how will you fashion your loan application or what are the key components of your loan application that ensure that you will get an easy nod? Well, remember the four Cs of loan application and remember to include them always. These are:
In very simple terms, these are guarantees that the bank or the loan providing organization takes into account while giving a loan amount to you. It is almost the guarantee that they keep just in case the borrower is not able to repay the loan that they take.
The loan processing firm would surely look at the possibility of your repaying the amount you are borrowing. One of the easiest indicators for them is the company’s cash flow record. For start-ups, the projected cash flow amount as outlined in the business plan is taken into account.
Commitment of Entrepreneur
This essentially is the money that the entrepreneur put into the business for starting it off. While this could be as low as 25% but forms a key indicator in terms of the person’s commitment to take up the risk that starting the business requires.
Perhaps nowhere else does your credit score matter as much as while applying for a loan. You credit score most times is an important indicator about your repaying habits, the discipline in paying bills, and higher the credit rating is higher is the potential for securing a loan. Essentially, this is that indicator that gives a loan giver a rough idea about the possibility of getting back the money that is being borrowed.
In case an entrepreneur has a relatively low credit score it could mean a major problem as this fact alone can really impact the prospect and ease of an investor getting the loan and addressing the capital needs of the enterprise that they plan to start off.
In a nutshell, therefore, startup financing needs of a concept is one of the most important elements of starting off and creating a great enterprise. History has shown how entrepreneurs have gone to every extent from selling wedding rings to mortgaging their only house to fund their dreams.
While entrepreneurs need to stretch themselves for realizing success, it is also common knowledge that the extent of leverage needs to be reined in.
The entrepreneur should in no way leverage beyond their means. This will ensure that even if a particular idea does not take off as expected, it always keeps the options open for them to try out newer alternatives.