How to Find Funding for Your Startup
Do you want to start a business but have no funding? Funding is an essential element in any business startup. Business startups can be tough when one has insufficient funds. The method you choose for funding determines the speed you begin the business; some may take longer than others, hence inconveniencing. As an aspiring businessperson, there are several ways that you can use to get funding for your startup. This article reviews the top methods to fund your business.
An angel investor is a private entity or a group of people who provide financial backing for small startup businesses and entrepreneurs. This type of funding involves the exchange of ownership equity in the company that you want to start up. Once they invest in your business, they will own part of the business. These investors have surplus funds and are looking to get higher rates of returns in your business. They may use their money or use crowdfunding to raise money for your business.
Depending on the agreement you have, the investment may be one-time or recurrent support to the business. Some may give the initial investment and only come through when your company is going through a hard time. All this depends on the arrangements you have with the angel investors. Compared to other lenders, angel investors have more favourable terms as they invest during the startup regardless of the course your business takes thereafter. Their main focus is on helping your business in its initial steps. To better understand the term angel investments, it is the opposite of venture capitalists, whose main goal is to get profits for your business. In other settings, angel investors are referred to as informal investors. Angel investors can come from family and friends or wealthy individuals who like your idea.
Pros of Angel Investment
• You get guidance and mentorship in business
• The funding is flexible and attracts a low risk
• Startup businesses get more ideas and growth opportunities
• Guaranteed credibility and networking
Also known as royalty-based financing, revenue-based financing is a funding method where investors give you capital in exchange for a certain part of the company’s gross revenues. As a businessperson, you benefit as you get funding for the startup without sacrificing or pledging part of your business or using it as collateral. The agreement is entirely based on the revenues you make. The funding method is different from debt financing as interest is not paid on the outstanding balance, and there are no fixed instalments for the investor to pay down the principal. Unlike equity financing, the investor has no direct ownership of the company or business.
For your business to be eligible for the revenue-based funding, it must plan to generate revenue; not necessarily profits but a profitability path. According to most investors, profitability decreases the default risk that the business has and reassures the debtor’s ability to service the debt. When drafting your presentation or proposal for the revenue-based funding, you must clearly show that your business can satisfy the required terms and generate revenues.
Pros of Revenue-Based Funding
• The funding options have longer repayment terms
• You benefit from larger financing amounts
• Your business does not get equity dilution
• The eligibility criteria and requirements are friendly and convenient for most startups
R&D Advance Funding
R&D advance funding, commonly known as research & development finance, gives startup businesses a chance to get their future R&D refundable entitlement in the form of an advance loan. Usually, the R&D credit is considered a future receivable, and businesses get that receivable funding service. While the application process seems a little hectic, it is worthwhile. Businesses begin by submitting funding applications. An expert from research development finance will then come and assess your credibility for the funding. Afterwards, an R&D advisor will verify the qualifying expenditure and determine whether you get the funding. Once the funding has been approved, you will get an R&D debt finance facility to access the funds. The best thing about the funding is that it is deducted from the tax returns after the financial year ends. Any proceeds from the tax return automatically go to repaying the loan.
Pros of R&D Advance Funding
• Attractive low rates
• You get quick and efficient services
• The funding has attractively low rates and low risks generally
• You maintain full control of your business
• Your company sells no more equity
• You get friendly terms for the repayment
How to Choose the Best Funding Option for Your Startup
Starting a new business has its ups and downs. Without reliable funding by your side, it can be pretty tasking to get your groove on. Lenders require a few things before funding your business. The first step is getting all the paperwork organised for quick retrieval. Here are a few aspects to look out for when selecting the best funding option for your startup.
Assess your Long-term Goals
As you anticipate starting your business, you must check the long term goals and know the funding that works best for you. Most people start a business with the hope that they will begin making profits almost immediately. Well, this does not always happen, and businesses may take longer to recoup the initial investment. Check your business's purpose and the milestones you intend to cross in the next ten or twenty years. With these answers, it will become easier for you to make the right choice for funding.
Check the Interest Rates
Money borrowed often returns as principal plus interest rates. These rates will then influence the total cost of the funding. You should concentrate on finding affordable funding options. Assess the interest rates from the potential lenders and ensure that you get the most competitive quotes. Do not be afraid to negotiate and ask questions.
Control from the Lenders
All these funding options have their intricacies. The most common one is the control of the lenders. Some options will take a particular percentage of the company, the revenue, or some assets. If you surrender partial ownership of your business, you will be giving up control. As you choose the funding option, think about the control you want for your business. If total control is important to you, choose options that allow you the benefit.
Have you enjoyed reading this article? After understanding these startup funding types, we hope that you will enjoy making the right choice as we did when writing it. As you choose the funding methods, you must carefully check the terms and conditions to avoid complicated clauses. Better yet, you can read the contract with your lawyer and get a clear understanding of the terms before penning down to sign. This is because the terms can be binding and mess your business up. Have fun getting your business on its feet.