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Different Types of Start-up Financing

27.02.2018

 

Self-Funding / Go-it-alone / Bootstrapping:

 

For early steps of financing startups, self-funding is the most favorable source of financing, because entrepreneurs use their own money to start their business and do not owe anyone else in the process. By using this financing method, entrepreneurs have total control of their business, and they may do as they please with their money. On the other hand, one disadvantage of this financing method is that, if the business fails, all the work that entrepreneurs had put into their savings will go to waste.

 

Friends and Family:

 

As entrepreneurs, can request funding from their friends and families. That is usually invested more because of their personal relationship rather than an accurate assessment of the business plan. The friends and family financing method often acts as a seed investment to get the business to a point where it will be able to obtain larger funding from a professional third party investor. Friends and family financing method constitutes faster funding process and flexible payment methods.

 

Crowdfunding:

 

Crowdfunding involves funding a business by taking small amounts of capital from a large number of people, usually via the internet. This type of funding makes use of the vast networks entrepreneurs have of their environments via different social platforms to get the word out about the business, with the goal of attracting new investors. Crowdfunding method has the potential of expanding a business by getting a pool of investors who can help raise funds. On the other hand, this method requires time and dedication before results may be realized.

 

Bank Loan:

 

Bank loans are one of the most commonly used source of funding for start-ups, especially in early steps. Before applying for a bank loan, it is important to ensure that entrepreneurs are well educated about the various options available, and the interest rates that come with each option. Banks may offer a range of funding amounts and payback options to fit entrepreneurs’ needs. On the other hand, bank loans are very difficult to obtain and their criteria is constantly changing.

 

Angel Investors:

 

Angel investors are wealthy individuals or retired company executives who provide funding in exchange for a share of equity in the business. Some investors work in groups and screen deals together before providing funds, while most work on their own. Angel investors normally have experience in the industry and can offer helpful guidance and introductions to their network. On the other hand, if they choose this method, entrepreneurs can be forced to give up some degree of control over their startup.

 

Venture Capital:

 

Venture capital is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth. Venture capitalists are investors who put in a considerable amount of money in exchange for equity in the business, and get returns when the business goes public or is acquired by another company. Venture capitalists only invest in startups that have the potential of providing good returns on their investment as all other investors, but they are more selective. Venture capitalists not only provide funding, but can offer expertise and mentorship to help develop the business. On the other hand, venture capitalists may direct the business in a direction that entrepreneurs don’t agree with.

 

 

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