A critical part of getting your business idea off the ground is to have access to good funding, whether it’s applying for a loan or through other methods. How much money you require depends on your business model. Several expenses can rack up your tab: building a website, social media marketing, industry research, associated legal fees, etc.
When you launch your start-up, it’s never prudent to put all your eggs into one basket. By diversifying your sources of funding, your idea has better potential to stay its course and be able to weather tough times and unforeseen circumstances. Financing your start-up with a business loan can be an effective way to source funds, but do remember that banking institutions have their agendas and interests and do not necessarily want to see themselves as your only source of start-up capital. By displaying funds from various financial sources, it demonstrates your pro-active entrepreneurial mindset, highlighting your business prowess.
Like any upcoming start-up, you have an array of funding options available, from loans to angel investors who see the potential of your idea. Whether you are going for a government grant or getting support from a business associate or loan broker, each source has potential benefits and drawbacks. Doing your research and assessment of your options is always recommended. Having the right mentor, coach, accountant, or lawyer can also help you build the right network and ensure success.
Here’s a quick overview of the five sources that you can consider in terms of financing a start-up:
The very first investor should always be yourself. If you aren’t going to invest in your idea, who else is going to? You might use your capital or use collateral on your existing assets. This sends a clear message to investors and lenders that you are taking a personal risk for your venture and that you are in it for the long haul.
Capital From Loved Ones
This refers to funds given by those closest to you. It may include investors who are family members or good friends that think of this as ‘patient capital’. They can even be your angel investors.
Before you borrow capital from someone you are close to, it’s important to recognise the potential issues. Although your family and friends want you to succeed, they may also want to receive some business equity or have some stake in your start-up. Think about this carefully and always seek legal advice. You should approach business dealings with people you care about with caution. Remember – if anything goes wrong, your relationship may never recover.
Venture capitalists tend to seek out technology-driven businesses and companies with genuine potential for high-growth returns in dynamic sectors, such as IT, biotechnology and communications. Take note that venture capitalists demand business equity or some form of ownership and will expect to receive a healthy return.
It’s critical to choose investors who have the relevant experience and background to boost your business. Venture capitalists tend to be in the higher realm of investments (starting at the $1,000,000 mark) and will often expect to have a say and a hand in the ongoing practices of the business, such as holding a senior position.
Angel investors are high net worth individuals who provide financial backing for entrepreneurs and start-ups, typically in exchange for ownership equity in the company. They can be leaders in their respective fields and can bring a wealth of experience and powerful connections to the relationship. They can also be amongst family and friends. Angel investors usually come on board at the start of the venture. They also tend to keep a low profile. Some may also choose to be a silent party throughout the entire business deal.
Although another viable pathway, competition for any grant can be complex. Grants often come with specific criteria that must be adhered to, so you must be well-prepared. Most importantly, you must ensure that your start-up is eligible before applying for a grant. While it’s not an easy undertaking, if you are successful, receiving grants can add credibility, gravitas, and further recognition to your start-up project.
A commercial business loan is the most common way to fund a start-up. It is vital to engage with the right lender or broker and discuss the terms that suit your circumstances. Fortunately, there are many a business loan broker in Melbourne who can give you the advice and assistance you may need about funding your start-up. Take your time to talk to professionals about your needs and work with them to ensure the loan process is successful.