When you are starting a business, getting going is often the hardest part. You need money but finding it without too many strings attached is a tough one. Whether you are rolling out a full software program, a software as a service company, or apps and self-service software downloads, there are development costs associated with them.
The primary issues with most startups are discoverability. How will anyone know that you exist? Whether you are going to pay for ads or use content strategies and inbound marketing or a blend of all of the above, the effort will cost you money. Not to mention that you still have bills to pay: the mortgage, the power bill, and whatever other expenses go with your household.
How do you get financing then? Well, there are several methods, and each has its own pros and cons. Here are five potential ways to finance your startup.
In an ideal world, you will have money in savings to get your business started. A simple recommendation is that you have six months’ worth of income so that you can pay your household bills and six months of the amount it will cost to run your business monthly. If you do not have this much (most people don’t) you should at least have some savings to help you start your business, so you are not strapped with debt right away.
You can build these savings by working an extra job for a while, cutting your household expenses, and even selling things you don’t need. Whatever you can do to build up your cash reserves will help you start your business on the right foot.
Since most people do not have enough savings to start their business this way, you will probably have to look at other options along the way.
You can use credit cards to get started if your startup costs are not too high. For instance, if you can run your business from home for a while with no office costs and associated overhead, that will save you a lot of money.
You can use personal credit cards, but it is better if you can start opening them in the business name and paying for things that way. This will help build the business credit, although at first these cards will be associated with your name and your credit. Just use these cards wisely. Don’t max out your personal or business cards when you are just starting out. You might need that credit for other things later.
If credit cards are not enough, and they often aren’t, you will need to look at other funding sources like loans.
There are several types of business and personal loans available, and it is helpful to know what they are and how to get a loan in the first place.
The first thing to understand is that at first, your business loans will depend largely on your personal credit score. You should know your score and work hard to improve it before you get ready to start your business.
The second thing to understand is that there are secured and unsecured loans available. An unsecured loan is essentially based on your promise to pay, whereas a secured loan actually has assets or investments you own backing it up. The difference is that with a secured loan, you can lose your assets should you need to default on the loan, so there is a certain amount of risk involved.
For instance, if you start your business using a home equity loan if the business fails and you cannot repay the loan, you could potentially lose your home. Only you can determine if this risk is acceptable or not. With an unsecured loan what is really at risk is your credit score and your ability to get credit in the future.
Ideally, you will take out small loans at first, build your business so it has its own credit score, and have less risk to yourself and your personal assets. You can secure loans with business assets instead once your business has them. Of course, the way you organize and incorporate your business will also have an effect on your personal liability too.
Just be sure to pay attention to the interest rates and terms and conditions of any loan you take out to finance your startup. You should consider private lenders, such as Kapitus if you want your business to start off on the right foot.
If you plan to go big, build your business quickly, and sell when someone makes an offer or establish yourself well enough to do an IPO, venture capital might be the right choice for you. Typically venture capitalists want a certain return in a certain amount of time, and the more they invest the more return they are looking for.
Raising venture capital means surrendering some control of your business. The capitalist will often want a seat on your board and will be involved in decisions regarding the company to make sure you are headed for enough growth to satisfy them and the other investors they bring along.
This can be a good thing, as more ideas are often better, but keep in mind that so few companies actually survive, and the ones that are making the money get the attention of the venture capitalists, that if yours is not on the right track you might get very little help and input from them.
Also keep in mind that if you miss those investment targets, there are often options where the lenders can take control of your company and even force you out. If you plan to go big, venture capital is for you. If not, it may not be.
Angel Investors are another way to go. They typically are a little less hands-on than venture capitalists, but still are looking for a return on their investment. Sometimes this means a percentage of profits or a percentage of the sale price if the company sells. Angel investing is often better if you think your venture may stay a mid-sized company and grow a little slower than what venture capitalists are looking for.
Keep in mind that whatever method you choose to finance your business and whatever kind of investors you bring on board, you will be giving up a certain amount of control and autonomy.
There are other ways to look for financing as well, but these are the most common ways to finance your startup. You will need money, so evaluate your choices and choose the source of funding that is right for you.