At some point, you will have the guts to chase your wildest dreams, and look to expand the revenue of your startup exponentially. News-worthy venture capital rounds, credit cards, grants, and loans are not the only ways to fund your expansion. Most of these lending choices either have onerous repayment terms, or will hand partial ownership to your investors. In many of these cases, "sharing doesn't mean caring."
Personal equity and bank loans are the main sources of financing for startups. Around 57 percent of startup owners use even their personal savings as start-up capital. Even worse, a quarter start with no start-up capital. This approach is most common with inexperienced entrepreneurs who have no employees.
Startup financing is normally done through either equity financing or debt financing.
Money from a venture capital firm doesn't need to be repaid, because it offers capital in exchange for partial ownership.
How to secure equity financing? We will later look at the different kinds of capital available.
Ex: an investor who gives money to a startup in exchange for company shares.
Ex. You get a credit card and go crazy.
You may ask why would anyone ever want to give up a piece of their company? Because they might be scared by tomorrow's rising interest rate and macroeconomic uncertainty.
An alternative option that costs you nothing. You get a business grant that you are not obliged to repay.
A note to keep in mind: some business loans require lenders to start payments the moment they receive the money. The other loans can cause extreme frustration due to the paperwork.
Check out the stats: while most businesses of all types start without external funding, female-owned enterprises are more likely to do this than male-owned startups. Significantly more men than women use bank loans to raise money for their startups, 6.6 percent versus 0.6 percent. However, we are not sexist and do not recommend choosing either of the options.
Financing implies obtaining or providing money or capital for expenses. Funding is money provided, especially by an organization or government, for a particular purpose.
Startup financing requires funding a business through equity financing or debt financing.
Let's talk about equity. Money from venture capital doesn't need to be reimbursed because it offers capital in exchange for partial ownership. Investors take that risk because they believe in the company. And they also want to become crazy rich when their equity will one day be worth exponentially more than their initial investment.
Debt financing: everything credit-wise involves interest. You are obligated to repay the lending organization for the risk.
You can be a startup that can do both. Neither is a monogamous relationship, after all.
Debt includes credit cards, corporate bonds, mortgages, leases, and notes.
You can do it publicly through a debt issue, or privately through an institution like a bank or government. Private debt financing mainly involves taking out a loan.
Drawbacks: The banks will have to be paid back by the debtor at some point. On the flip side, the length of loan is always negotiable, it can be short term or long term.
In 8 out of 10 cases, interest is tax-deductible for businesses. However, if you fail to repay lenders, you must declare bankruptcy or default. As a result, you will mess up the borrower's credit rating, thus harming the ability to raise further future capital.
Recent stats: about 2/3rds of small business owners are in debt.
The verdict: Deb financing can be less costly than net earnings or equity financing.
Equity represents the value of repaying a company’s shareholders if all the assets were liquidated and the company's debts were paid off. By exchanging shares with external investors for capital, business owners can use this equity for financing.
The most common equity financing comes from venture capitalists and private equity firms. You give up complete control of your company since investors obtain voting rights that can weigh in on business decisions.
As well, you also share the future profits with them.
Need a reminder of why you should even consider this option? That ownership means you're not required to pay back the investors' money.
You get off the anxiety train and have time to build your business without the pressure of monthly payments.
Remember the phrase: "If I go down, you go down with me?". Same here. If your company goes bankrupt, investors lose out too.
Keep in mind that equity doesn't come with tax benefits.
Also called net income is the gross earnings minus mandatory deductions, such as state and federal income tax and social security contributions.
Or, to simply put it: your company makes a profit, so you can use it to fund other business opportunities.
With net earnings financing, founders grow a business or fund new projects without giving equity or taking out debt.
If you did give up some of the shares early on, this is a chance to reward investors and shareholders with dividend payments, or buy back shares to regain ownership control.
Reality check: while the net earnings model is the most cost-effective way, the truth is that a startup cannot always use its income to invest in itself. Most companies need help to create a product or service worth selling.
This option is available only when you are cash flow positive. So let's see how to get the funding you need to build:
Some startups require more financial aid than others. Don't get $100,000 just because you can. This is a committed relationship, and you don't want to get stuck with unnecessary interest and other payments. Here are a few choices for financing:
Before choosing any of the aforementioned, get your P&L, Cash Flow, and Balance Sheet in order. Or don't, and see what happens. You can master the art of delegation and give these tasks to people who love Google sheets and graphs. Use Fuelfinance, for example. Book a session, and quit killing yourself trying to crunch the numbers.
