Paths to capital-raising for start-ups
Posted on: May 15, 2021
Category: Company Formation , GBO Blog
New businesses are usually rich in ideas and enthusiasm, but short of the wherewithal to realize the dream, which is ready money. Having the right source of capital can make the essential difference in helping your business start-up in many ways.
The standard model of a start-up requires outlays to hire staff, acquire office space, tool up the necessary equipment, material needed to build a new product and many more costs. Once the product has reached a mature stage, serious money has to be spent going live with trials to build in the reality of what the consumers want, then creating advertising and marketing campaigns, and much more.
All of this expenditure must be financed before there can be any expectation of a revenue flow from sales, so built into the whole plan there needs to be an answer to the question … “where will you get funding from?”
We have many years and instances of experience helping our customers get from their dreams into a viable realization and share the basics here. Of course, your individual needs and capabilities must come front and center, so don’t hesitate to discuss the details with us before making any moves.
Banks are still the most well-known source of business funding, but the reality is that conventional banks are risk-averse when it comes to lending. The chances of raising significant amounts without being able to provide adequate collateral are slim. Lending terms are generally strict, and banks usually stipulate a fixed repayment schedule, which is not easy to commit to for a new business trying to grow.
A thorough business plan that clearly outlines your intended expenditure and revenue streams will ultimately help your application.
Professional investors represent a pool of wealthy individuals with knowledge and experience in investment. An angel will typically be prepared to take a substantial risk in return for a significant stake in the business. This has the dual benefit of satisfying the capital needs and providing you with experience and expertise in managing the business.
There are several forums where you can locate the right angel for your business. The Angel Investment Network connects angels with available funds with businesses seeking capital. You can find an example on the UK Business Angels Association site.
Venture Capitalists (VCs)
VCs are a more structured version of Business Angels. They are oriented towards investment in start-up companies that they judge have exceptional growth potential. Like angels, VCs usually take a substantial stake in the company and insist on one or more seats on the board of directors. They may also require some say in the operations of the company via a managerial role.
In the main, VCs have been investing in tech start-ups that are providing innovation by exploiting new technology. One example of this was the start-up TransferWise, which received a substantial injection from the VC firm SeedCamp.
Most governments are aware that allowing new businesses to escape from their environment into other more welcoming countries is a path to loss of income down the road. Therefore, many have set up special bodies that can be applied to specifically for funding to establish start-ups inside their own jurisdiction. One such example is the UK government’s Start Up Loans body, which commenced in 2012. It has already funded more than £250m to small businesses around the country.
In most countries, they offer generous terms, with extended repayment periods and moderate rates of interest. Most importantly, they don’t burden the borrowers with the need to pledge their own assets as collateral. In the UK, Start Up Loans also offers advice from business mentors who have experience in business planning and forecasting.
There are thousands of potential investors watching online platforms. The range of interested parties is broad, and they usually are aware of which areas of the economy present exciting opportunities. Investment from crowdfunding can come from business owners in the same field as your start-up, from business angels looking for opportunities, and from the general public interested in what you’re selling. The most popular crowdfunding platforms are Crowdcube, Kickstarter, SEEDRS, and Indiegogo, but doing your own research can probably find a platform that caters specifically to your business sector.
Government and public institutions often have allocated financing for businesses whose products or services are generally beneficial to society or supply some needs that otherwise cannot be fulfilled. If your business can promote the wider public good while at the same time generating a positive cash flow, you could be eligible for a grant.
Grants tend to require substantial justification and documentation, so they are generally slow and time-consuming. Building a business plan based on grants should instead take the longer-term view, where the grant is a later step for expansion and growth, and not as a necessity to establish the business.
Peer to Peer (P2P) lending
Similar to crowdfunding, P2P is an online forum matching borrowers with lenders. P2P lending usually bypasses the strict conditions of bank lending and is negotiated for relatively low fees and interest rates. It is essentially a loan that can be negotiated very quickly, and is a way to raise funding at the very beginning. Some examples of websites are Funding Circle and Zopa.
How much start-up capital is required to start a business?
Every type of business will have its own special financing needs. Some research by the U.S. Small Business Administration puts the very basics, for a home-based micro business, at a minimum of $3,000. If there is a need to acquire inventory, a web presence, a marketing campaign and other simple actions, the costs will run upwards of $2,000 to $5,000 just for setup on top of that. Experts can give you some tips to help you figure out how much cash you’ll require.
What are examples of startup costs?
All costs associated with the startup must be catered for. Expenses relating to the process of creating a new business such as the business plan, research expenses, borrowing costs, and expenses for technology. Once the process has been started, ongoing costs including advertising, promotion, and employee expenses
With the right ideas, it is possible to change the world, but having the necessary funding makes the likelihood of success much greater. Turn to the experts in our organization for the ways that suit you and your business.
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