Best idea for Startup Financing Options for Small finance Businesses
by CorpSeed Pvt Ltd Environment | Compliance | Finance
The funding for start-up and long-term financial benefits are important pillars for a successful startup. After all, in addition to an innovative business idea, new businesses depend above all on financial resources to make their usually sustainable growth sustainable. Of course, the amount of capital a company needs depends on the business model. But where do the funds come from?
In addition to traditional creditors such as banks and state institutions, there are nowadays several sponsors specialized in financing new businesses. The startup phase of a startup differs significantly from that of a company that is based on a consolidated business model. So what are the options available to you for the foundation and financing of a startup?
How do you get funding to start a startup?
If you want to start a business, you need a certain amount of start-up capital. The amount varies from case to case: some startups need only a small sum of money at the beginning, while others have to start from the beginning from a five or six-digit capital stock to start their business idea properly.
In both cases, a company should be able to provide accurate and long-term business financing. This facilitates the evaluation and weighting of the amounts necessary for each department of the enterprise. In principle, the financing necessary to start a business can consist of equity capital and third-party capital.
Few founders have enough capital to start their own business. For this reason, external investors must be persuaded to decide to invest in the proposed business idea. There are several ways to attract lenders and investors, but a complete business plan must be formulated first. This applies in particular to bank loans and other institutional grants. Initially, some new entrepreneurs, however, are satisfied with a simple financial or liquidity plan . You must, therefore, consider how much time you have available to draw up these plans.
The concessions for startups differ from subsidizing conventional companies in that startups often operate in a new market or one that does not yet exist in this form, so in a less experienced and tested sector of activity, investors classify an investment as risky. All the more reason if there is no proven business model in the economic sector concerned, many lenders are afraid to invest.
However, there are several other options for funding startups. Our overview is aimed at giving you an idea of the possibilities that you could consider for your project.
Financing a startup with equity capital
Equity capital is the money that the founders or owners of business provide to finance it or that remains within it as a profit generated. Since you won't be making a profit in the startup phase, you should first ask yourself if you have the money you would like to spend on your startup. And, in case you don't have them, it is worth looking for other possibilities of financing through third-party capital.
Bootstrapping: finance yourself
Many founders use their personal assets as a basic fund for their startup; this method of self - financing is also known as bootstrapping. Those who manage to finance a company with their own resources ensure the greatest possible self-determination; on the other hand, if the company is not successful, it will have to guarantee its own assets.
In most cases, however, there are insufficient funds to finance the foundation. You need third party grants relatively quickly especially if your business model requires large investments, large numbers of employees and/or a complete infrastructure.
The 3 "F": Family, Friends & Fools
Some founders turn to their family and friends and/or acquaintances to finance their startup. Borrowing money from private individuals has two clear advantages over a conventional loan: on the one hand, you do not have to pay interest and on the other, you have more breath in repaying the amount. On the other hand, however, personal loans from friends or family members are delicate, as they can be controversial.
Therefore you should make sure to review all repayment scenarios together and make clear arrangements with lenders, possibly writing them down. In general, however, your investors need to be aware of the high probability of startup failures and that you will not be able to repay your debts immediately.
If you borrow money from your family and friends and bring it to the startup on your behalf, it will be part of your equity in the company. The lender's shares are also treated in the same way as your company, even if the difference is that the person in question automatically becomes a startup partner.
Private shareholders and sponsors (business angels)
In principle, you have the option of acquiring partners as equity providers for your startup. For example, these may be the people mentioned above (family, friends) or business contacts.
Sponsors of startups specialized in financing are known as "business angels". Such lenders not only provide founders with funds that they can invest directly in the further development and economic strength of the new venture but they usually also provide assistance and advice for setting up and/or expanding the venture. In return, however, supporters usually receive company shares.
In many cases, the partners also acquire a right of co-decision on the strategic orientation of the new company, which limits its self-determination. The most important thing is how the collaboration with the shareholders is structured and if they share your ideas about the company.
Startup private incubators
In addition to publicly funded business incubators (see the section "Consulting and public subsidies for new businesses"), there are also several private centers for new businesses - some called incubators, other accelerators, and other company builders. or innovation centers. For cooperation, it is necessary to apply. Depending on their orientation, business incubators support different types of startups: for example, some centers only support technology-oriented companies and others only student and graduate startups. However, they all have in common the fact that they already qualify companies from a very early stage.
As a rule, start-up centers offer financial, consultancy and infrastructure support: they bring capital in the start-up phase (for which they usually receive company shares) and provide advice and support for the creation and growth of the company. In addition, they often help with further capital supply and organize contacts in the sector and suitable premises for companies (offices, plants, warehouses, and so on).
Venture capital ("VC"; also known as venture capital) is another option for corporate financing. This is "over the counter" share capital with which the so-called venture capital companies (associated companies) acquire shares in a company considered at risk. Such venture capital firms often have a greater influence on corporate strategy and decisions than business angels or private incubators. This is due to the relatively high sums with which they enter a company.
However, startup investors rarely participate in businesses that are still in a very early stage; rather, they tend to take action later as big investors. Usually, the goal of the investment is the profitable sale of the startup's shares at a later stage.
Traditional venture capital firms operate in the financial sector and generally have more capital than business incubators or wealthy individuals. Another form of venture capital that founders can receive is corporate venture capital (CVC), which is provided by large companies or groups of companies. By investing in new businesses operating in a similar sector, companies plan to diversify their offer
Credit financing for the startup of a startup
Loans are usually treated as a third-party capital, as they provide funds that need to be repaid within a certain period of time and are usually subject to interest. Usually, such a loan is obtained from financial institutions.
Classic bank loan
One of the most common ways of setting up a business is the classic bank loan, but many banks are rather reluctant to use it to finance startups, as their business plans are often classified as riskier than classic business models.
Another reason why banks don't grant credits to many startups is the lack of guarantees from the founders. However, this should not stop you from exploring the possibilities of a loan with your bank or other lenders.
Consultancy and public subsidies for new businesses
Those who want to start a startup are not necessarily forced to resort to private financing: there are in fact countless ways to request public subsidies. There is great interest both from the Indian state (and from the regions) and from the European Union to encourage entrepreneurial initiatives and thus increase employment by guaranteeing public funding for new businesses.
The demand for state incentives is of three different types:
Automatic: completeness and regularity of the applications are verified, which are analyzed in the order in which they were presented and taken into consideration until the related funds are exhausted.
Evaluation: in this case, the administration must submit the questions to a technical, economic and financial investigation.
Negotiation: concerns territorial or sector development interventions.
A convincing business plan must be the basis for an effective program. To be such it must contain the following elements:
- productive and profitable targets
- target market and competition
- strengths and weaknesses
- threats and opportunities
- economic and financial analysis
Funding phase for a startup
In the process of financing a startup, similar phases can be observed, from which a model can be drawn for the development phases of startups, which in some ways clearly differs from the start-up and long-term support of ordinary companies.
Hardly a single investor is able to guarantee a startup to function. Support from several independent sources is much more common: donors whose pooled grants subsidize a startup that is starting up for a long period of time are not uncommon. If the firm is successful, it gradually goes through several stages of financing in which the sums paid continue to increase.
We distinguish between early stages ("initial stages", divided into seed and start-up phases ), expansion stages (" expansion stages ", including the growth phase and the bridge phase) and later stages ("final stages "). What are the distinctive features of these funding stages and what are the donors who offer themselves in each case?
Initial stages: initial funding
Those who have to start their startup need a certain amount of initial capital to start the initiative. How much is needed for the first steps depends on your business idea? It is therefore, first of all, a matter of concretizing your startup idea and defining the possibilities to achieve it (seed financing phase).
Only then, in the so-called start-up phase, develop the final product (the good or service you offer). In addition, here you will also deal with the organization of the processes necessary for its marketing.
Every company starts with an entrepreneurial idea. In the seed phase, you will focus on this in detail and specify it. It is advisable to draw up a business plan that allows you to obtain start-up financing as quickly as possible and a form of support that is sustainable. This will make it easier for you to convince investors of your concept and encourage them to invest in your startup.
Market and target analysis help develop a business model suitable for the future. In addition, discussions with people from the areas concerned can help you review and implement your business idea.
In the seed phase, it would be good to take a close look at the organization of your team. Above all, it is necessary to clarify whether you need further strengthening and competence for the implementation of your startup. After all, it is not only the business plan that convinces investors and lenders but above all the people who support it and their know-how. The chances of receiving a fund increase significantly if the team has all the necessary skills and competently introduces itself to potential investors.
Establishing contacts in your sector can be another important contribution for the future of your startup: you can benefit from the experience of other people in terms of financing and company foundation and possibly also find one or the other missing piece in the puzzle. Many founders met people during networking who were equally enthusiastic about the business idea and therefore contributed to the startup both financially and with their own experience.
In addition, it is essential to consider from the outset how much money to expect to implement your idea. Funding planned solidly testifies not only a way to work professionally, but also shows to your lenders how high their share of the total amount of which presumably needs to fund the foundation. It should always be borne in mind that subsidies for startups that have not yet been established represent a high risk for investors. Therefore you should always give them as much transparency as possible and convince them that your project has a good chance of success.
Equity capital: some founders can rely on their savings to use them as equity capital for their startup, even if full financing of the business project with their savings is the exception.
The 3 "F": Family, Friends & Fools: you can decide to involve people from your circle of friends and family to get a financial contribution and thus increase the capital of your startup. But not only that: there may be shareholders interested in your business concept ready to invest in it. This group is called "Family, Friends and Fools" (FFF), in which the term "fools" is meant jokingly: when a lender invests funds in business projects in a reckless manner (for example because very convinced from the idea or simply find the founders nice), he may not be discouraged by weaknesses or risk.
Business angels and private incubators: business founders have the opportunity to receive support both in monetary and consultancy terms through cooperation with business angels and / or start-up centers. Business angels support businesses where they see the great potential and long-term profit opportunities and act as mentors to the founders. In addition to equity, they contribute their know-how and their network of contacts. For this, they obtain shares in the company and therefore become co-owners of the startup. Profit-oriented business incubators have a similar approach.
Public subsidy and subsidy programs: there is also the possibility of applying for grants to found a startup. A good number of these funds come from state subsidies for setting up businesses, but also from private institutions such as banks. In addition to traditional funding programs, participation in an ideas competition or business plan in the seed phase can also be envisaged.
Crowd financing: in addition also crowdfunding, crowd investing and crowdlending can contribute to the financial base of your startup. Before choosing which of these campaigns to take, take some time to work on a professional presentation of the project, which is detailed but not verbose and ideally containing a high-quality video.
This phase is the foundation of the startup: everything revolves around the correct entry of your company into the market. To do this it is necessary to further develop the product, start producing a prototype (if it has not yet been done) and proceed with the expansion of the necessary infrastructure (development, research, production, sale, and so on). Generally in this phase, it is decided first whether to manufacture the product independently or whether to have it designed externally, and finally whether to manage independently or outsource sales.
In addition to product development and general conditions, customer acquisition is also the focus of this phase: you could start the first marketing and advertising campaigns. You should also plan in detail how to finance the startup in the coming years. This roadmap not only provides an orientation with which you can evaluate the current financial situation at any time but also helps in finding new lenders and creditors.
In the start-up phase, you still cannot hope to make profits, far from it: at the start of the start-up, you will still be in the red due to the investments mentioned above. That's why it's so important to find investors who share your vision and believe in your concept.
Finally, the start-up phase ends with the launch of your product on the market. For some businesses, however, this stage of development is definitely complete when they reach the break-even point (also breakeven point or break-even, abbreviated ), or when the costs and revenues that arise in the product manufacturing and distribution cover themselves mutually - that is, neither losses nor profits are made.
Overall, the startup phase lasts from 1 to 3 years. At this stage, the costs increase because in addition to implementing your product, you usually have to spend more on new employees and campaigns. In order to meet the additional expenses, start-up funding is often required, usually from institutions similar to those in the seed phase:
Sponsor: Often business angels and private innovation centers are also willing to accept companies that already operate.
State subsidies for startups already established: Although many public subsidy programs and competitions for new businesses are aimed at businesses not yet on the market, some also accept applications from new businesses that have been active on the market for one or two years. As a rough guideline, the firm should not count more than 1 or 2 years (maximum 3 years) of activity in order to still have a chance of obtaining public subsidies.
Support through crowds: The startup phase is also ideal for financing through people who believe in your project and want to make their own contribution. This is because, especially with regards to crowd investing and crowdlending, potential supporters believe that investing in a startup after a successful foundation is less risky.
Venture capital: Some venture capital firms invest in new firms at a relatively early stage. In this case, it is worth submitting the application in advance, as it can take up to 12 months for a final decision to be made on the financing of a particular venture by a venture capital organization.
Once you have successfully entered the market, you will dedicate yourself to expanding your startup. This period, known as the expansion phase, is divided into two phases: the growth phase and the bridge phase.
In the growth phase ("growth" in English) we first try to consolidate our product on the market. To guarantee availability, sales and production must be expanded. You also need to invest more money in marketing to make the product better known. If this is successful, the demand will increase together with the startup turnover.
It is not uncommon for the quantity and/or size of competitors to increase. This is particularly true when a startup operates in a market segment that previously did not exist to the same extent or that did not exist at all, but which has now established itself and is finding many imitators. The rule of thumb that applies in such a case is as follows: the more competition there is, the more capital a startup needs. As a rule, this is the only way to offer the product on a large scale and ensure an advantage over your competitors. Therefore, in this phase, it is better to invest more in production, sales, and marketing.
Many founders in this step expect to make a profit; however for some startups, this may still not be the case even in the growth phase. For example, if a startup wants to introduce itself to the market by involving many costs that will pay off only later, it is absolutely not necessary to make profits in the growth phase.
However, as soon as you make a profit, you will be in a better position to collect the additional funds needed to further expand your business. Once again, the increase in equity capital makes the company interesting for a wider circle of investors. Now even financially stronger holding companies and lenders could develop an interest in your startup. The sources of money often used in the growth phase are:
Credits: As soon as your business makes a profit, the chances of getting a loan from a financial institution increase.
Business angel: even in the growth phase, you can continue to rely on startup sponsors.
Venture capital companies: VC suppliers are willing to participate in the financing of a startup with large sums of money if these are financially safe. The funds are around one million dollars.
Advantages of bootstrapping
Classic startup investors such as business angels, business incubators or venture capital firms expect to be able to pronounce on the company's orientation in exchange for their financial and advisory support. Founders who do not sell shares of their startup to lenders maintain full control over all business decisions, not to mention that the entire profit remains in operation.
In most cases, fully self-financed firms are forced to operate more efficiently than other third-party financed firms. After all, the funds are scarce, which is why any unnecessary costs are avoided.
Whoever manages to set up a profitable company with the bootstrapping strategy, favors his reputation as a successful founder and entrepreneur. Consequently, if he needs to use external financial resources for current or future projects, he will have a greater chance of obtaining them. Moreover, investors and financiers have greater confidence in founders who have already been successful with a business model that has been self-financed from scratch. Likewise, it also gives a good impression to business partners and customers.
Disadvantages of bootstrapping
However, those who do not want to become dependent on external investors and want to build their own company or with co-founders must have patience and endurance: since most of their corporate capital must be generated from equity, there it takes longer to get more money. Nonetheless, some business ideas require more capital, especially during the expansion phase.
In addition, the risk of a loss-making company in the bootstrapping sector is higher: if the founders provide the entire capital of the new company on their own, but are ultimately forced to suffer losses and file for bankruptcy, the costs remain their responsibility. The pressure exerted on the founders who finance themselves can, therefore, be very strong. Furthermore, in bootstrapping it is not possible to benefit from the advice and experience of external investors.
In summary: what are the possible financing scenarios for startups?
If your project is convincing, you can find several partners to finance its implementation. In most cases, it will be of great help to have a professional business plan that is neither too short nor too long to get potential investors to sponsor your idea.
Financing before and after starting a business is sometimes very different from raising capital for traditional businesses. Many investors do not aim to receive dividends or interest, but in exchange for their investment, they wish to buy shares in the company. The startup lenders such as business angels, the crowd investing partners, private incubators or venture capital companies often consider it as an investment to risk capital, and a resource able to pay through the continuous distribution of profits or subsequent profitable sale of the shares.
The sale of company shares allows you to act immediately with greater financial strength. You will also benefit from the participation of external investors if you do not yet have experience in financing and training companies and if your partners help you with this task. This can be done, for example, through consultancy but also through assistance in operational activities. In return, however, many investors require you to have a say in the direction and operation of the company, which means that you must be prepared to lose some of your decision-making freedom.
The bootstrapping is still an option to consider for the founders who have sufficient equity and/or a business model that can be monetized quickly. With this approach, we try to carefully build our startup with equity capital without becoming dependent on external investors. However, contrary to the collaboration with the shareholders, the financial risk is entirely borne by you. In addition, the company is unable to grow so rapidly because of the lower financial resources it has. Nevertheless, 100% control over the business is maintained.
However, those who do not have the financial resources necessary to start a business do not necessarily have to sell company shares in order to make a profit. They may also seek to obtain loans, startup India Registration or grants through crowdlending. The financing of goodwill and the further development of a startup, therefore, depend on many different factors. Provided that you have a promising business idea and present it in a professional and convincing way to suitable financing agencies and investors, you will certainly have many opportunities for financing your startup.
Created on Mar 20th 2020 07:25. Viewed 485 times.