To help get your business idea off the ground, access to funding – via applying for a business loan, or other methods of raising start-up finance – is a critical part of the process.0
Just how much money you need to get things moving depends on your chosen business model.
Building a website, creating social media marketing and coming up with all the necessary marketing collateral (including photography, copywriting, advertising expenses) can be expensive – and that’s after the set-up costs of industry research, logo design, business name registration, associated legal fees and other business establishment costs that might include everything from a commercial lease and fit-out to purchases of computer equipment, office furniture, vehicles, signage and uniforms.
When it comes to finding the finance you need to launch your business start-up, it’s never prudent to put all your eggs in just one basket. By diversifying your sources of finance, your start-up has greater potential to weather potential storms and stay the distance – even in the inevitable tough times.
Applying for a business loan is a clever way to source funds but it’s important to remember that even the lending institutions you connect with don’t see themselves as your only source of that much-needed start-up money. When you show them you are also sourcing funds from a variety of financing alternatives, it tells them you are pro-active and entrepreneurial – positive traits for any business owner.
As a start-up launching into the business space, there are several funding options available. From bank loan to angel investor, applying for a government grant or gaining support from a business incubator resource – each different source of financing comes with its own potential benefits and negatives. Weighing up which options are best for your situation by doing the research and crunching those all-important numbers is always recommended. A business coach, accountant and lawyer are all good people to have in your network for business-building success.
Here’s a brief look at five typical sources of financing for start-ups:
1. Personal investment
For any start-up, the very first investor should always be yourself. You might use your own cash as a resource, or use collateral on your existing assets. This sends a clear message to investors and lenders that you are happy to make a commitment to your own venture – and that you are in it for the long-haul.
2. Love money
This refers to funds lent from people who care about you. It might include family members or good friends and investors and lenders think of this as ‘patient capital’ that will be repaid to your loved ones over time as the profits in your business increase.
Before you borrow love money from someone you know, it’s important to recognise the potential issues. Your family and friends want you to succeed but they don’t always have spare capital. By lending you money to fund your business start-up, they may want to receive some business equity. Think about this carefully and always seek legal advice. Any business relationship between people you care about should always be treated with caution. Remember – if anything goes wrong, your relationship may never recover.
3. Venture capital
It’s vital to realise that venture capital funding will not suit every entrepreneur. Typically, venture capitalists seek out technology-driven businesses and companies that have genuine potential for high-growth returns in dynamic sectors, such as IT, biotechnology and communications.
Venture capitalists demand business equity or part ownership and expect to receive a healthy return.
To ensure you receive what you need in return for the money they invest in your business, it’s important to choose investors who have the relevant experience and knowledge to boost your business. Venture capitalists tend to be in the realm of investments in the $1,000,000 vicinity and often expect to have a hand in the ongoing management practices of the business, such as holding a board position, or similar.
4. Angel investors
Wealthy individuals or retired company executives are the typical angel investor who enjoy funding small companies and start-ups. Often, they are leaders in their respective fields and bring a wealth of experience and potentially powerful connections – as well as funding – to the relationship. Angel investors usually come on board in the start-up stage of a business’s life, with funding investments of between $25,000-$100,000. Keeping a low profile, with no expectation of being a vocal part of your business, is typical.
5. Government grants
Applying for grants can be a full-time job in itself and experienced grant writers are a valuable resource to help you get your application across the line. Competition for any grant is always tough and with specific criteria that must be adhered to, it is vital to read the fine print to ensure your start-up is eligible before investing hours of time to fill in the necessary forms.
Often, even grants that seem great still require you to match the grant contribution, so without access to other funds up your sleeve, it can be a challenging path to take. If you succeed, though, the rewards are often more than merely financial, as winning grants adds a touch of peer recognition that can add important credibility to your start-up project and help you make valuable connections to business support services and industry leaders.
6. Business loans
The most common form of start-up funding for any small-medium business enterprise is a commercial business loan. Choose your lender wisely by hooking up with an experienced business loan broker who can help you find the funds you need, with terms that are realistic for your individual cash flow and situation.
Shopping around for any loan is always a smart thing to do and by engaging with a professional broker, you can find a business loan to suit your circumstances, without the stress.
For more information about business loans to fund your start-up, talk to our commercial lending specialists at Lending Specialists today.