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One of the main problems you will encounter when looking to start your own company is how you will be financing the startup business. There are various factors to consider when deciding which funding source you should utilize. At the same time, you also need to look at the various funding sources and think about how each of them will affect your company.
Funding Sources Of Start Up Business
You can raise capital for your startup through various channels. Some of them include -
Angel Investors: If you are just starting up, then angel investors are a very good option for you. Angel investors invest in early stage start up businesses. Their investment is often limited to $1 million to $5 million. You will have to give a share of your company in order to receive funds from angel investors. But the huge benefit is that you can raise capital without any taking any personal debt. Plus, experienced angel investors will also guide you so that you can grow your business successfully.
Venture Capital: Also known as VC funding, this option is mostly available only if your start up has been in operation for a few months, and you at least have a working model of your product or service. Investment can range from $10 million to $100 million or more depending on your product, company growth and market potential. As with angel investors, venture capitalists will own a certain percentage of shares of your company for investing in your business.
Bank Loan: If you do not wish to give up any ownership of your company, then a bank loan may be suitable for you. But the negative aspect of this is that your start up business will start off with a liability in your balance sheet. And if your business revenues dwindle, then it may become difficult for you to meet your loan repayments. So before taking a bank loan, make sure that the future prospects of your business is very good. You will need to provide collateral to receive a bank loan.
Private Lenders: If you are unable to get a loan from a bank, then your next bet is to approach a private lender. You will have to pay a higher interest rate for the loan, but it will be far easier to get financing for start up business from a private lender than from a bank. Even if your credit history is a little sketchy, the private lender will still consider your application for a loan as long as you have sufficient assets. You will also have greater freedom to structure the loan repayments with a private lender than a regular bank.
Leasing: If your start up business involves the use of heavy machinery, then you can also consider leasing as a source of funds. Instead of taking a loan to purchase the machinery, you can lease it. The biggest advantage of a lease over a bank loan is that the lease is not recorded as a liability I the balance sheet. As such, your company's financial ratios will remain positive and this gives you a much better chance to raise more debt in the future.
Crowdfunding: One of the latest ways to raise funds for a business is through crowdfunding. In a crowdfunding, you can post about your business and your product or service at crowdfunding websites. If the users of the website feel that your presentation is top notch and your ideas are worth funding, they will donate a small amount to your cause. When a large number of people make such donations, you can effectively raise a huge amount of money to fund your business. The biggest advantage of crowdfunding is that you neither give up ownership nor take up a debt. Crowdfunding is mostly suitable for tech start ups.
Create a good business plan so that you have a very clear idea of what assets your business requires and how much revenue you expect your business to generate over the next few months or years. Once you have a solid grasp on such aspects of your business, you can then start looking for funding sources for your start ups more efficiently.
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