How To Source Money for a Startup Business
Hundreds of thousands of people choose to launch a new business each year. According to the Small Business Administration (SBA), more than 27.9 million small startups launched in 2010 alone. Of those, more than 75% were identified as a “non-employer” business. This means that nearly 21 million startup businesses were solely generated and owned in 2010. And with advanced technology, that number has continued to grow.
Unfortunately, the odds of achieving startup busines success are slim. In fact, according to data from the Bureau of Labor Statistics: about 20% of startups fail in their first year, and about 50% of small businesses fail by their fifth year. In the US, nearly 50% of new businesses fail before they reach 5 years and just a third stay open for a decade or more. While this is true, there’s a small percentage of startups that mature to stable, successful businesses.
Since the journey into a successful business is rife with challenges, it’s important for owners to get as much support as they can. Many hire a business coach to help them stay focused on the right things to run and manage their business, but startup costs can be daunting. So if you’re launching your startup and trying to get a business off the ground, use these tips to raise money to help this effort.
When launching your startup, it’s a good idea to research the funding options available first. One of the most popular startup approaches is self-financing. While self-financing can be somewhat easy, there is a significant downside; you will always be on the hook when the business struggles.
Self-funding can be self-limiting. I’ve seen many entrepreneurs with great ideas and the best intentions hit the financial wall. Most entrepreneurs have more hutzpah and Moxy than realistic budgeting for dollars and cents.
Funding a startup can be more costly than most new entrepreneurs realize. And, many business consultants (and bankers) say self-funding is often counter-productive. When startup owners face financial constraints, they tend to make short-term investments. Tight purse strings cause undo strife as owners struggle to make smart, long-term business decisions.
Despite the evidence of a high failure rate for startups within the first 5 years, self-financing is still attractive. And self-financing is still the most common way to fund a business startup.
There are millions of decisions business owners make to drive a startup’s overall direction. So, if you can use your own reserves to fund your startup, you’ll have the most control.
To self-finance your business, consider using personal savings, selling assets, using credit cards, and/or borrowing against the equity in your home.
2. Family and Friends
If a person is unable to tap into their own resources, or if they don’t have a credit score that’s good enough to secure a loan, it’s possible to turn to friends and family members for help. Sometimes, it is easier for a person to convince someone they know to make an investment in their idea than an anonymous bank official.
Friends and family members look past a person’s credit score or their current account balances when deciding if they should give a loan. Also, they probably won’t demand a strict repayment schedule or very high-interest rates. Family and friend financing is a popular option for startups. Up to 70% of startups are financed by family and friends.
3. Venture Capital
A third way to fund your startup is to use a venture capital (VC) firm. A VC directly funds your new startup or fledgling company in exchange for equity in the future business success. If you’ve seen the popular show Shark Tank, you know how this works.
Because most VC firms are partnerships that invest firm money, they are extremely selective. They tend to invest in startups who’ve established profitability, or those with excellent business plans.
A VC firm’s goal is the ability to cash out its equity state if a startup business eventually has an IPO. When a startup is sold to a bigger business, VC investors get paid.
Competing for VC funding is quite intense. Some firms receive more than 1,000 proposals each year. Most often, venture capital firms will only consider startups requiring significant investment, such as $250,000. VC firms look for the highest return on investment (ROI) for their capital.
What Investment Option is Best?
It’s a good idea to consider all financing options when launching a startup. You’ll want to find the right investment option with the lowest risk. During this stage, it’s important to seek help to get a small business started. While each funding option has pros and cons, there’s a good chance one will be best for your startup business.
Please share your thoughts and comments
Are you launching your startup and trying to get a business off the ground? Which of these options would work best for you? Do you have tips to share? Share your experiences with us in the comments below!