As an entrepreneur, one of your greatest challenges is getting funding to launch your startup. One reason getting funded is so difficult is that many entrepreneurs have unrealistic expectations about how to finance their companies. Therefore, they spend time and resources on avenues that rarely lead to success.
This article discusses five realistic ways to finance your new startup. These tried-and-true sources have been used by entrepreneurs in every industry.
1. Your Own Money
The most common way entrepreneurs finance their businesses is using their own money. First-time entrepreneurs seldom find investors or other sources because they have no track record.
However, being the only investor in your startup has advantages. You get to make all important decisions without needing someone else’s approval. Furthermore, you reap the rewards if you succeed, but pay the price alone if you fail.
Saving enough money to launch your startup requires a lot of dedication, patience, and time. So start saving money as early as possible. Depending on your business, this process can take a couple of years of careful planning.
However, avoid investing all your savings in the business. Set aside some money in case things don’t go as planned.
2. Your Personal Credit
Many entrepreneurs prefer to finance their companies using credit cards. This option allows them to leverage their personal credit for the business. While this approach is risky, many entrepreneurs consider it an acceptable risk.
If you decide to use credit cards, consider using them only to pay for expenses associated with a specific project. Once the project is delivered and the client pays you, pay back the credit card. Don’t use the card for any other type of expense.
3. Friends and Family
Although getting external investors is difficult, some entrepreneurs manage to convince friends and family to invest in their businesses. This strategy is common, but keep in mind that mixing money and relationships can cause problems. Therefore, manage this process carefully.
Decide if you want them to lend you money or if they will be buying equity in your business. Both methods have advantages and disadvantages.
Loans need to be repaid but allow you to keep ownership. They also have a definite end date. Equity investments, on the other hand, don’t need to be paid back, but they give the investor a say in the company and a share of the profits.
Before signing on family investors, work with a lawyer to draw up a legal contract. This step may be expensive but it’s important. Lastly, treat your friend and family investors professionally, just like you would treat any other investor. This practice goes a long way in helping you avoid problems.
4. Your Vendors
One often overlooked source of financing is your vendors. Often, small businesses can ask their vendors to give them 30 to 60 days to pay an invoice. These payment terms give you use of their products and services for up to two months at no extra cost and is similar to an interest-free loan. Smart entrepreneurs can use vendor financing to grow their operations. The key is to time the delivery of your services so that clients pay you before you have to pay vendors.
5. Asset Based Financing
One increasingly popular alternative in recent years is asset based financing. For many startups, their two major assets are accounts receivable and purchase orders. Invoice financing helps growing companies that have cash flow problems because clients are taking 30 – 90 days to pay invoices. Purchase order financing, on the other hand, helps companies that need funds to fulfill a purchase order. Both solutions are available to startups, as long as the underlying invoices and purchases orders are from creditworthy companies.
What About Angel Investors and Venture Capitalists?
You probably noticed that I did not include angel investors and venture capitalists in the list. Getting their funding is extremely difficult. Unless you have a unique concept and a seasoned team, it’s best to consider funding your business with the previously discussed options first. Remember that venture capitalists scrutinize hundreds of deals before finding a suitable candidate.
Look for venture funding only after you have generated a prototype, or, better yet – actual sales. Proven revenues will go a long way in helping you convince external investors to give you funding.
Image courtesy of Howard Lake.