How to Get Funding for Your Business — Startup Financing Explained

How to fund your business

It costs money to start a business. Funding your business is one of the first — and most important. How you choose to fund your business could affect how you structure and run your business.

Whether you opt for a bank loan, an angel investor, a government grant, or a business incubator, each of these sources with its own plusses and minuses

SO First of all determine how much funding you’ll need:

Every business has different needs, and no financial solution is one-size-fits-all. Your personal financial situation and vision for your business will shape the financial future of your business.

Read on our guide to know where to look for funding, and which type might be right for you.

1/ Begin With Bootstrapping

When first getting started, many entrepreneurs use “bootstrapping,” which means financing your company by scraping together any personal funds you can find. This typically includes your savings account, credit cards, and any home equity lines you may have.

This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks.

With self-funding, you retain complete control over the business, but you also take on all the risks yourself.

2/Get venture capital from investors

Investors can give you funding to start your business in the form of venture capital investments. Venture capital is normally offered in exchange for an ownership share and active role in the company.

Venture capital differs from traditional financing in a number of important ways. Venture capital typically:

  • Focuses high-growth companies
  • Invests capital in return for equity, rather than debt (it’s not a loan)
  • Takes higher risks in exchange for potentially higher returns
  • Has a longer investment horizon than traditional financing

Almost all venture capitalists will, at a minimum, want a seat on the board of directors. So be prepared to give up some portion of both control and ownership of your company in exchange for funding.

How to get venture capital funding

There’s no guaranteed way to get venture capital, but the process generally follows a standard order of basic steps.

  1. Find an investor Look for individual investors or venture capital firms. Be sure to do enough background research to know if the investor is reputable and has experience working with startup companies.
  2. Share your business plan The investor will review your business plan to make sure it meets their investing criteria. Most investment funds concentrate on industry, geographic area, or stage of business development.
  3. Go through due diligence review The investors will look at your company’s management team, market, products and services, corporate governance documents, and financial statements.
  4. Work out the terms If they want to invest, the next step is to agree on a term sheet that describes the terms and conditions for the fund to make an investment.
  5. Investment Once you agree on a term sheet, you can get the investment! Once a venture fund has invested, it becomes actively involved in the company. Venture funds normally come in “rounds.” As the company meets milestones, further rounds of financing are made available, with adjustments in price as the company executes its plan

What Investors seek:

they are six basic points that you must have in your business in order to get funding

  1. first, you must have track recording for at least two years
  2. How profitable you are
  3. Forward-looking business plan
  4. at least breakeven within 6 to 9 months
  5. A highly profitable business model
  6. Good management team

3/Use crowdfunding to fund your business

Crowdfunding raises funds for a business from a large number of people, called crowdfunders.

There are typically three types of crowdfunding: reward crowdfunding, debt crowdfunding, and equity crowdfunding. With reward crowdfunding, you raise your funds by reaching out to supporters, who receive a small gift or product sample if they pledge a certain amount. As for debt crowdfunding, you receive a loan and pay it within a specific time frame — some prefer this over a bank loan because it can be much faster. And last, but not least, equity crowdfunding means you give a portion of company ownership to the people who provide you with funding

Below, we take you through some of the Internet’s best crowdfunding sites.

The 7 Best Crowdfunding Sites of 2021

4/Get a small business loan

If you want to retain complete control of your business, but don’t have enough funds to start, consider a small business loan.

5. Family and friends

It’s common in the early stages of a business for parents, siblings, or friends to financially support your business. This option is most suitable for businesses that need initial support to prove the concept can be successful, to the point where they can seek other funding.

Pros

It’s a quicker funding process with flexible terms. Depending on how much interest you pay your friends and family, this could be a great investment for them.

Cons

Mixing business with family and friends’ finances can damage relationships if things go wrong. You’ll need to carefully assess the possible impact of business failure before proceeding.

6. Angel investment

Angel investors are wealthy individuals who provide funding in exchange for a share in your business. Some investors work in groups, whilst others work on their own.

Business angel investment is not suitable for businesses that want to retain 100% control of their business.

How to find angel investors

Your next question, of course, is how to find the “angels” that might want to invest in your business.

You can post your business plan on websites that bring angel investors together. The two most reputable sites in this area are:

also, you can check our angel investors program

Pros

Apart from the cash, angel investors will have experience and should be able to offer valuable business advice and guidance.

Cons

You’re likely to have to give up control of your business to some extent.

7. Incubators and accelerators

These are programs designed to scale and grow ambitious start-ups. They provide mentoring and small seed investment in return for equity in the start-up.

249Startups offers a number of programs to incubate entrepreneurs as an example orange corners incubation program, Orange Corners is an initiative of the Ministry of Foreign Affairs of the Netherlands that provides young entrepreneurs across Africa and the Middle East with training, mentorship, network, funding, and facilities to start and grow their businesses. they support innovative solutions to local Challenges, that contribute to the UN Sustainable Development Goals.

Orange corners Sudan

Pros

In addition to funding, these programs offer structured training and valuable expertise to help develop your business.

Cons

The application and selection process can be grueling.

4 factors that could affect financing your start-up:

1/Your professional profile

Bankers need to understand your project and know that you’re a good risk. You need to establish your credibility and show that you have done your due diligence. You’ll also need to show you have thoroughly researched your project.

Is your work experience related to your new business? How did you come up with the idea and what’s your industry experience? You need to prepare your case because your answers will be evaluated by your lender.

2/Your project’s viability

You will need to show a business plan that leads to action. How does the loan you are asking for fit into your company’s overall strategic plan?

Questions that you will be expected to answer about your business plan include the following. Your answers will need to be precise.

  • Where are you going to find your clients?
  • How did you choose your location?
  • Where are you going to find your suppliers?
  • How many customers do you expect in a day?

3/Your financial strength

A banker will want a detailed breakdown of your financial projections for at least the first year of your operations and up to two years.

4/Your guarantee

For a start-up business, the bank will typically ask you to sign a personal guarantee, which makes you responsible for the loan.

How much money can you invest?

The bank will also look at how much money you will be investing. This makes your personal net worth important because the bank needs to see that if you aren’t going to take a salary for six months that you can afford to do so.

Can you meet your personal obligations, rent, or mortgage payments for example, without drawing on revenues from your business?

Most of the time the reason why people don’t succeed is because of the lack of their own cash. We want to make sure that you can re-invest in your business if something doesn’t go as planned.

Resources:

  • https://www.startupdonut.co.uk/financing-a-business/10-options-for-funding-your-small-business
  • https://www.sba.gov/business-guide/plan-your-business/fund-your-business
  • https://www.sba.gov/funding-programs
  • https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/start-up-financing-sources
  • https://www.themuse.com/advice/show-me-the-money-7-ways-to-get-funding-for-your-business-idea
  • https://articles.bplans.com/how-to-get-your-business-funded/
  • https://www.thebalancesmb.com/best-crowdfunding-sites-4580494
  • https://www.investopedia.com/articles/pf/13/business-financing-primer.asp

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