Finding the Right Funding for Your Startup: Where Should You Begin?
Obtaining funds for a business can be particularly challenging, regardless of the current economic climate of the region or country that you’re in. Whether it is capital for your startup, or for expanding a specific facet of your business, or even to brace for tough times, securing funds will still be a difficult affair.
The exponential increase in startups and entrepreneurship has resulted in the sourcing of other financial means and options for these small businesses. However, one thing that people have to keep in mind is that it is vital for one to comprehend the feasible methods of financing a venture will be different from one business to another.
What type of capital to raise?
It is a commonly known fact that based on the kind of business one is planning to run, they should either choose between an equity and a debt. Each of them has their own benefits. For example, when it comes to debt, one does not dilute or relinquish ownership of the company or business unlike in equity. This is simply because, at some point, the debt must be repaid.
While selecting loans, one has to bear in mind that interest might result in difficult financial periods in the long run, which in turn, could result in insolvency.
Hence, cash flow is needed in order to make payments for both the principal and the interests, and should be well budgeted for. Moreover, the bigger the debt-equity ratio that a company has, the riskier it is for the company to be considered.
Moreover, it has also been observed that debt instruments further contain restrictions on a given company’s activities, thus prohibiting the company from having alternative financial options.
The positive thing about debt, however, is that it guarantees the ease of operations because the company is not necessarily required to give investors periodic reports, or even required to give shareholders periodic meetings. Moreover, it is not necessary for the company to seek the vote of shareholders before executing certain activities.
That being said, debt funding should particularly be accessed an average of 3-4 years after the company has been operated.
When does one proceed to raise capital?
The main rule here is to get a few purchasing customers before proceeding to seek out an investor. Moreover, before contacting the investor, one should also have a co-founder or a functional team.
Hence, one should always raise money somewhere in the line between really needing it and not needing it at all. For example, an ideal method would be to have a good run for at least a year, and then commence on fundraising activities the second half of the year.
Where can one raise funds from?
Getting funding for your startup is akin to getting married. If one does not select the right Avenue or investor for funding, it can prove catastrophic in the long run. Here are some five mantras to keep in mind when searching for investors:
- Ensure they have familiarity
- Are trust-worthy
- Being sure of what you want
- Being frank with the investors
- Looking for investors that are aligned with your interest
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