How to Finance Your Startup Business
Coming up with the idea for a new startup is only the beginning. Pretty soon you’ll be realizing that you need capital for computer hardware, software, office furniture and office space, plus money for initial wages, even at lower levels, with the promise of stock options in the future.
It is possible, of course, to do like Apple once did and bootstrap right out of your garage but that kind of setup won’t last long if the business is to succeed for years or decades to come. Real money is ultimately needed rather than only dreams to sustain a business interest.
Even if your business can be run with no commercial office space and just your founders working on it, if you are doing things right you’ll need to be capable of dealing with an expansion that could potentially happen quite rapidly, and this includes financial planning. This means that whatever your strategy is at the outset, you’ll need to have plans in mind to get your hands on capital for your business in its early days.
Here are a few of the ways that a startup can be financed.
Traditional Bank Loan
According to the U.S. Small Business Administration, business lending has been on the decline in the last few years. This follows the financial crisis in 2009.
Regardless, the traditional bank loan still represents a significant percentage of business loans that are provided. With more than 25 million small businesses operating in the USA at any given time, there is robust demand for bank loans for those tiny businesses.
Applying for a business bank loan is another matter entirely though. Often, personal guarantees have to be given outside of the business structure to secure the business loan. This can make young entrepreneurs nervous indeed. It is a common story that successful businesses often required their founders to stake their houses on the success of the business, and of course, what you don’t hear about are the times when that business did not do so well. Also, if you don’t currently own your own home or have any particularly good financial assets, you may not be in a position to do this kind of thing anyway.
Crowdfunding is still in its infancy, but for certain startups it can make sense to at least look at it. The idea behind it is that non-traditional business models that are unlikely to ever match the lending criteria for traditional business lenders can look to crowdfunding.
There are many crowdfunding sites to consider each having their own pros, cons, biases and objectives. Some are generalists and will look to set up funding programs that anyone can invest a small amount into whereas other crowdfunding sites are far more specialist in nature.
Cash Advance for Business
For startups that are already revenue generating with paying customers using PayPal, credit cards and debit cards to pay for their services, there is the option of a business cash advance to consider.
This provides upfront financing to help with business expenses in exchange for repayment via either a regular business checking account payment or a percent of credit card receipts being paid back to the business that offered the cash advance.
Venture Capitalists look for startups that are usually not off the ground yet or have proven themselves to be adept at rapid growth in a new, interesting market segment. The challenge when dealing with venture capitalists is that they will take significant chunks of ownership in the business for an initial round of financing. This will later often lead to further rounds of funding which deplete the founder’s stake still further. In extreme cases, the founder can create a large, successful business that they no longer own a majority stake in.
A more daring option is to reach for a personal credit card to secure a cash advance large enough to get a startup off the ground. As cash advances usually cost the highest rate of interest chargeable from the day it was taken out, this usually represents the highest cost in pure finance charges at least. If you have a business plan that needs only a small initial cash investment and with which profit could be seen fairly quickly, however, a credit card can be a convenient approach.
When beginning a startup, consider the question of financing carefully. The decision is likely to stay with the life of the business and can meaningfully impact its long-term viability at times too.