The first thing to remember about business strategy is that one should never rely on just one source of financing. When you have a new startup, this fact becomes even more important. When there are several sources of investment, however small, you have a sort of safety net. Up and downs come to any business, but a new one is especially turbulent. Apart from the usual precautions, diversifying financing sources would make it easier to reach your funding goal.
When bankers are thinking about investing in your company, it’s not like they’re considering themselves as the only supporters, financers, and investors. If you put the entire burden on them while pitching your idea and brand, they could get seriously turned off by the idea of such a risk.
There’s a lot of advantage you can gain from showcasing just how many financing sources you’re pursuing or have at the moment. This gives potential lenders the impression that they’re dealing with a hands-on entrepreneur.
Methods to Finance Your Startup Company:
Finances could come from several sources, such as regular bank loans, angel investors, grants, or even business incubators. Every source has its own pros and cons, which also depend on the kind of business you’re running. They would also have different requirements for loan approval or investment. We’ll be taking a look at seven kinds of financing options that start-ups should consider pursuing:
1. Personal Funds:
An entrepreneur launching their own business should have some of their own money invested in their dreams. This could be in the form of either cash or collateral. Investing your personal assets into your startup is likely to create a good impression on the lenders and investors you approach later on. This shows that you believe in your line of work and are willing to risk your own neck on it.
2. Patient Capital:
Also known as ‘love money’, this is an investment done by the entrepreneur’s family or friends. These are the loans that one isn’t pressurized to pay back right away. When you start getting increasing profits, you will then consider repaying.
However, one should not really rely too much on such capital. First, one’s social circle isn’t likely to be loaded. Such investors are likely to want an equity share and a lot of input in your business. Finally, personal relationships shouldn’t be mixed with business without serious thought – otherwise a lot of negativity could come into play.
3. Venture Capital:
Venture capital may not be the best choice for every startup, but it’s great for some. Venture capitalists have some specific niches which they’re interested in. These are usually tech-related business and those that have a very high potential for growth in the IT, tech, biotech and communications industries.
In return for their investment, venture capitalists demand a position of equity. This is so that they can both support and help in the accomplishment of a challenging yet risky project. This could compromise the control entrepreneurs have over their own company.
Additionally, venture capitalists demand quite a lot of return. This is usually generated only when the business shares are made public. Since there’s such a high demand from such investors, one should make sure that they have relevant experience for the business you’re operating.
BDC has a team for venture capital that is experiencing in lending its support to advantageous companies. These companies are usually set to become the market leaders in their respective sectors. It mostly focuses on intervening only when such a company is in need of large investments in order to cement its place in a high-potential market. BDC thus banks on companies with a huge potential for growth and high return.
4. Angel Investors:
Angel investors are those who are either very wealthy people or CEOs who have an interest in small, promising companies. Such individuals have been at the top of their game for quite some time and can hence give any startup the benefit of their experience as well as business contacts. Their management and technical experience also come in handy for a company who’s just starting out.
Angels usually go for investing in the very beginning stages of a company, with relatively smaller investments than those of venture capitalists. The usual angel investor may invest within the range of twenty-five thousand dollars to a hundred grand. Venture capitalists tend to go for higher inputs, around the neighborhood of a million dollars.
In return, angel investors want the right to see over the workings of the beneficiary company. This means they mostly get to have a representative on the director’s board as well as know the ins and outs of whatever goes on in the business.
It’s quite difficult to locate an angel investor since they don’t generally make themselves known. In order to get in touch with them, one has to contact certain organizations or websites that hold their information. NACO (The National Angel Capital Organization) is one such association and specializes in angel investors in and for Canada. They have a member’s record where one can get an idea about the interested angels in their area.
Once located, once should be sure to reach out to an angel investor in the right manner. You should first find out what a certain investor is interested in, and then see if your pursuits match those interests. If you reach out to someone who’s not even familiar with your sector or the work you do, this action could become quite a blow to your reputation.
Try to connect with investors during networking events or mutual circle, such as through your college alumni network. These strategies are likely to be more effective than cold e-mails. However, cold e-mails themselves could have quite an effect if your research and focus is thorough. It’s hence advisable not to leave any stone unturned if you really want the support of an angel investor.
5. Business Incubators/Accelerators:
Business accelerators mostly opt for companies and startups located in the high technology industry. They support businesses that are new to the market but have a lot of potential for growth.
There are also such things as incubators for economic development on a local level. These are concerned with web hosting services, revitalization, job creation, etc. With incubators of any kind, the usual practice is to get startups and potential businesses together and have them all talk about their ventures. They would also share some information about their resources for administration, logistics, and technical departments. For instance, a business incubator might offer up the use of its machinery, laboratories, or even some space for an upcoming business to use. This would lead to the cheaper production and testing of new products. This is called an incubation phase.
In general, such phases end within a couple of years. When the company has its product or service ready to launch, the incubator’s contribution is passed on to some other beginner. The newly established company would then go into a phase of industrial production and is able to stand on its own feet.
This supportive method is usually found in cutting edge and modern economic sectors. These could include Industrial Technology, IT, Multimedia, etc.
In order to find and make use of these incubators, one can get in touch with organizations like MaRS. They have information about business accelerators and incubators within Canada along with several links to other useful resources.
6. Government Investment:
The forms of government investment are called grants and subsidies. For instance, Canada Business Network has a website where one can see a list of government programs that provide investment at several levels.
The criteria for actually getting one of those grants, however, are quite high. There’s usually a lot of competition and the regulations are quite strict. Many of the grants provided require one to match the cash amount given to some extent. In general, though, you may be looking at:
- Describing your project in great detail
- Explaining how beneficial your work is to the economy
- Completing the requisite application forms wherever necessary
- Showing a work plan with all the costs worked out
- Giving evidence of experience on the key points of management.
The criteria for assessing a grant proposal include the following:
- The significance of the proposed project
- The approach of the business to the problem at hand
- Innovation in ideas
- Previous and relevant experience
- The amount of investment needed.
If a startup doesn’t get a grant, they may want to see how they fell short in one of the requirements above. Perhaps they were asking for too much money, or the work they proposed was unrealistic and irrelevant. Their location may also not be the right match for their work. They should hence work more on communicating their ideas so they seem rational and provide a proper focus.
7. Regular Loans:
When we talk of loans, the most common meaning is a bank loan. All sizes of startups usually consider tang out a bank loan to fund their beginning stages. However, different banks have different criteria and there are upsides plus downsides to maintaining business contacts with them. You should look around and see what available banks are offering, like repayment terms and personalized customer service.
Bankers, like other investors, are looking to invest in organizations that have a trustworthy and moderately successful history. they should have a good credit score. It’s not enough to have an innovative idea; you need to have a sound plan of work. Entrepreneurs may also have to personally guarantee that the loans would be paid back.
Financing to start-ups is offered by BDC in the first year or phase of operation. Principal payments could get postponed for the few months as well.