To borrow or not to borrow. That’s a question only you will know the answer to.
When setting up a new business, it can be hard to know where the money will come from in those tricky early days, or how much cash you’ll have to kick off your operations.
Luckily, there are plenty of avenues you can explore. Some of your options, such as bootstrapping, are more modest and risk-free. Others, such as venture capital, can land your business a hefty payout, but it’ll come at the cost of your company’s equity.
There’s no one-size-fits-all right or wrong answer when the question of funding arises, so let’s take a moment to explore some of your most common options as a new business founder.
Sometimes, the best way for a business to grow and scale proportionately is by founders pulling themselves up by the bootstraps and funding out of their own pockets.
Wildly popular television series like Dragons’ Den may well have us believe that the only way to get a company up and running is through a significant injection of cash. However, this doesn’t have to be the case.
The image above illustrates that, although cash injections can certainly be beneficial to startups, they aren’t always necessary.
Bootstrapping is an organic way of raising money, and will ultimately be the most rewarding if your business begins to scale and you’ve accumulated little formal debt and lost no equity in your business.
It’s important to stress that it’s a big ‘if’, though. Bootstrapping has to be regarded as the most difficult way to finance new business in the short term. Unless your savings are near-limitless, there will be setbacks and difficult days to navigate. Side hustles are a popular way of putting in the hours elsewhere to raise funds, but this approach is highly taxing both physically and mentally.
In some areas of the industry, the notion of hustling and struggling your way to success is revered as a badge of honour.
It’s certainly impressive to straddle two jobs and thrive on four hours of sleep per night – but it’s not worth risking your health and happiness when there are alternative fundraising techniques out there.
Bank loans are a relatively reliable way of accessing good amounts of money without having to give up a share of your business or risk struggling to make ends meet.
However, as Inc. notes, attaining bank loans has gotten more difficult in recent years.
In the US, lending standards have become considerably more strict for newer businesses – making it much more difficult to find a loan that’s healthy for your startup.
However, banks such as JP Morgan Chase and Bank of America have earmarked a credible amount of funding for small business lending – so it’s always worth exploring this option if your more organic avenues for fundraising are closing.
In the UK, it’s possible to apply for small business grants that enable startups to gain access to money that doesn’t need to be paid back.
Because of the interest rates associated with most bank loans, it’s important to conduct a serious level of cash flow forecasting before you turn to help here. It might seem highly appealing to gain a healthy windfall in the short term, but this extra monthly repayment could make it harder to continue to build revenue.
Venture capital is a popular option for founders looking to attain significant levels of funding to match their scaling ambitions.
While utilising bank loans can land small businesses with a sizeable chunk of money to cover the costs of setting up operations, a venture capital firm is capable of funnelling anything from £100,000 to £25 million into a project that they believe has potential.
The venture capital option also usually comes with greater levels of exposure and easier opportunities for businesses to scale.
The caveat is that venture capital firms typically ask for a share of your business in return for their investments – meaning that your stake in the business that you’ve founded will be diminished and you’ll not receive the whole fee when you decide to sell up.
It’s also worth pointing out that this option is one of the most difficult to action on the list.
Because of the scale of money involved in venture capital firms, most businesses need to present themselves as an endeavour with huge potential before there’s even an opportunity for money to change hands.
Look out for angels
Angel investors operate in a fairly similar way to venture capital firms. They usually consist of one or a few individuals or a small organisation who invests in businesses by making an equity purchase.
The great thing about attracting an angel investor is that you can call on their industry expertise and take on their guidance as your company grows. However, as the financial climate of today is significantly less stable than that of, say, pre-2007, finding an angel investor is significantly harder at this moment in time.
Angel investors tend to lend startups money to help them grow, scale at a sensible rate, and then reclaim their share in the company after a few years of growth for a profit.
With this in mind, it’s always a good idea to offer an angel investor the option of an exit strategy when looking to attract one.
The art of crowdfunding is one that’s as old as time, but it’s certainly a practice that’s been made easier in recent years with the arrival of websites such as Kickstarter.
The great thing about crowdfunding is that business owners don’t have to repay the money that’s been invested, and can offer their own incentives for individuals as a way of thanking them for their investments.
If you’ve marketed your business effectively then crowdfunding could generate a healthy amount of money to expand your business. However, it’s fair to say that crowdfunding isn’t the sort of place where owners turn to in order to secure long-term funding – and the platform is usually utilised as a means of gaining financial support for one-off ideas and products.
When it comes to funding your business, the most important thing to remember is to be patient. The idea of receiving fortunes in venture capital may seem like a dream come true, but you’ll be counting the costs when your business expands and equity is lost to investors.
Bootstrapping could be the most measured way of financing a startup but don’t commit to a struggle and let it dominate your life. Building a prosperous business is highly rewarding, but it shouldn’t come at the cost of your own mental health.