According to Boefly’s blog small businesses can face various challenges within their first years. Referring to the Small Business Administration, 10 percent of startups will go out of business within first year and only half of them will last five years.
David Young, partner at the law firm DLA Piper, explains that “historically, the hardest piece of fundraising is that first piece of cash. The first million.”
Before thinking of the first million…
Before even considering external financing, your financial means on hand should be well-organized. According to Catherine Clifford‘s, writer at entrepreneur.com, blog “one of the biggest mistakes new entrepreneurs make is not keeping their personal and business finances separate.” If that happens, it can have a damaging impact on your business.
Edward Wacks, business financial advisor, explains that “if you are paying business expenses with personal funds or vice versa, it becomes challenging from an accounting standpoint to know what your profits or revenues are for your business […].That makes filing your business taxes a headache.”
Once you got your finances in order, you might go looking for additional financial resources..
How to get that first piece of cash…
Akhil Shahani, serial entrepreneur, claims in his blog that first of all, you need personal resources. Self-financing definitely is an option and even if you want to reach out for external financial support, “you’ll need to have invested some of your own funds in the business. Banks and other lenders like to see some kind of financial commitment from the principal owners of the business before they dive in.”
Kate Harrison, eco-entrepreneur, on the other hand focuses on non-venture funding options and provides a large variety of opportunities in her blog. Harrison argues that there are two major categories of funding: debt and equity. Using debt financing a “startup agrees to pay back a loan with a predetermined timeframe and interest rate”. Equity financing on the other hand means that the startup “sells ownership shares in exchange for funding.”
Let’s look at different options of debt financing
1. Banks. Community banks continue providing loans when larger banks cut lending to startups.
PRO you only start paying interest when you start spending the money.
CON It could be difficult to get a loan and you pay high interest rates.
3. Peer-to-Peer Lending. Debt-based lending transactions supported by websites such as Prosper.com and LendingClub.com. Those websites directly match borrowers and lenders.
PRO “Startups with good credit rating might be able to negotiate lower interest rates.”
CON “Loans above $25,000 are often unavailable. Loan and company information is publically available on the internet.”
PRO Startups can avoid going to banks and still get funding.
CON Business has to “prove sufficient cash flow for repayment, which is hard for most young companies to do.”
4. Crowd Funding. “Ideas are funded online through a public platform and investors are repaid in goods or services such as inventory, equipment or real estate.” Crowdcube further explains that this is a way to “raise business finance by tapping into a ‘crowd’ of like-minded individuals willing to invest smaller amounts of cash in exchange for rewards and a stake in their business.” Example: Kickstarter
PRO Asset-based financing does not decrease control of the business.
CON Often does not raise enough revenue per investor. You might not “get any of the funding unless you raise the entire amount.”
1. Angel investors. Private investors who finance start-ups for a share of their equity.
PRO “Open to lending smaller amounts for longer time periods.” Investors “might be willing to take a higher risk for potential profit” because they “specialize in an industry”
CON Investors “can take a significant stake in your company depending on the terms.”
PRO “The terms of these investments tend to be very friendly for businesses [..] and put risk-free money in the hands of entrepreneurs.”
CON “These investments often come with conditions on how the money can be used which can lock you into a plan.”
Every business is different and needs different financing plans. Now it is up to you to pick the one that best suits your startup!