You’ve been sitting on a great business idea for a while. You’ve created a business plan and are preparing to get things off the ground. But there’s still one crucial requirement you’ve yet to fulfill.
Financing a startup is one of the most common challenges for entrepreneurs. You’ll need to acquire capital if you don’t have it yet. Fortunately, there are several approaches you can take, each with its advantages and disadvantages.
This post will cover the four main things you need to know about financing your startup: what financing is, two funding categories to be aware of, why a business plan is important, and some financing strategies to consider.
What ‘Startup Financing’ Means (And How Financing Differs From Funding)
‘Startup financing’ and ‘funding’ are sometimes used interchangeably to refer to the same thing. But they’re separate concepts that share somewhat of a gray area.
‘Startup financing’ refers to the money acquired to launch a new business venture. Businesses typically seek financing for capital expenditures, business operations, expansion, globalization, acquiring real estate, or onboarding new team members. However, financing is typically money the lender expects you to pay back with interest (nondilutive financing) or given in exchange for partial ownership (dilutive financing).
‘Funding’ is a similar but much broader term. It’s money procured for a business to achieve a specific goal. It differs from ‘financing’ in a way that some types of funding aren’t expected to be repaid, such as a government grant. Essentially, though, it can be given as a debt, in exchange for equity, or as sponsorship money to fulfill a mutual interest.
The Two Main ‘Categories’ To Keep In Mind
Gaining capital for a business might be considered from various perspectives and looked at from multiple categories. And there are many types of funding or financing you could gain. But there are two specific sorts of funding to be aware of.
Namely, these are dilutive and non dilutive funding. Without going into too much detail, whichever of these types of funding you acquire will later affect your ownership of the business or how much debt it has.
Here’s a quick overview:
Dilutive funding dilutes your business ownership by exchanging equity, or shares, in exchange for capital. Alternatively, nondilutive funding grants capital without sacrificing equity, but you’ll likely be promising something in return.
It’s important to consider how each of these will influence your business and the decisions you’ll need to make. For example, dilutive funding often means you’ll need to consider the interests of other equity holders. Would you want to do that long-term?
You Should Create A Concise Business Plan
A business plan is an almost nonnegotiable requirement when negotiating third-party financing or funding. They’re not as tricky to create as you might expect. Having one helps you define your goals, keep your business on track, and reach the milestones you set. You can also use it when reflecting on your business strategies after reaching those milestones.
Not only that, it’s your opportunity to show you’re doing everything mentioned above. Nobody hands out money for free. Everyone who gives you money expects to gain positive financial returns from you. A good business plan helps inspire confidence that their investment won’t go to waste.
Different Ways To Fund Your Startup
By now, you must be asking how to get startup financing. There are too many options to cover them all. But these are some of the most common methods used by new entrepreneurs.
1. Personal Financing.
This is when you use your personal funds to finance something your business needs. It can minimize debt or equity dilution even if you can’t finance everything. You can also take on personal credit lines, which you must be prepared to pay back in installments with interest. It can minimize debt or equity dilution even if you can’t finance everything.
2. Business Loans.
Applying for a small business loan is another valid path. You can get one from a bank or another lender. To apply, you’ll usually need your credit history and something to put up for collateral. You may also be asked to define exactly what the loan is for, which is where a business plan will help. Most loans can be considered an example of financing.
A relatively new and popular way to amass business capital. With crowdfunding, you publicly publish a detailed description of your business and product. The goal is to garner the interest of those who want your product. Then anyone can either donate money or give you money as a ‘preorder,’ and you promise they’ll receive your product when you’ve gained sufficient funds. Crowdfunding is a type of nondilutive funding.
4. Venture Capital.
You’d usually consider venture capital when your business already generates revenue. It’s essentially a type of equity funding provided by private investors. It’s a good idea to learn about your investors before taking this route. They’ll also want to know about you, so you should know your business well and be prepared to answer any question.
Starting a business is never easy; finding enough financing for a startup can become one of your biggest hurdles. Luckily, there are multiple ways to get the capital you need. And if you’ve put effort into creating a valuable product or service, you have a good chance of finding someone to invest in you.
Prepare your business, yourself, and any business partners because it can be a challenging search. Ensure you know your business and understand what each financing option you seek entails. Good luck!