Tuesday, October 18, 2011

Financing Options for Start-ups

One of the biggest challenges for many start-ups is to find money to keep the company running. Break even point has not been reached and with expenses exceeding sales revenue , a CEO will soon need to look for financing options.

Where you get your financing depends on:

• what kind of business you are starting and industry you’re in,

• how much money you need to raise and

• what you will use the money for

Here are some of the financing options:

Family, Friends and Personal Savings

Personal savings are one of the easiest ways to finance your business. This option may be the best option in the earlier stages of the business, especially when you don’t have a product or clients. You don’t have to answer to any outside investor who only cares about how soon they are going to make their money back and not about the company. This may be your only choice if you aren’t able to attract investors. Family or friends can also be an alternative source, however be careful if they invest in your business. Is it worth losing the relationship if your business fails?

Angel Investors (early stage)

Angel Investors are investors who invest only in early stage start-ups and have been known to invest between $15,000 to $500,000 for equity in your business. Angels mostly invest once a business has been proven and has made some revenue. In certain industries, angels invest as a group, especially when they see a great opportunity.


Incubators became popular during the dot-com boom, where they provided office space, access to mentors and IT infrastructure in return for a percentage of a business. They have become very popular recently, with an increasing number of incubators popping up around the world. Incubators work very closely with entrepreneurs by mentoring them in every aspect of the business from sales/marketing to operations. This is why many successful start-ups come from incubators. However, the success of an incubator depends on the experience of its board of directors and investors.

Venture Capital

Venture capital has become a popular option for many start-ups, however it is difficult to get financed by VCs . They are very selective in the investments they make, investing in as little as 1 start-up for every 100 proposals they receive. Due to the fast returns expected, VCs look for high growth potential start-ups that can provide them with a quick exit and a return on their investment in a short amount of time. If you feel that your start-up has a lot of potential for a VC, the best way to get in front of a venture capitalist is to network and get introduced by a mutual acquaintance.

Business Loans

Approaching a bank for a business loan is a standard path to fund a start-up. However, with the financial chaos affecting economies, many banks have become extremely risk averse. Although the benefit of getting a loan is that you keep ownership of your business – getting a loan will depend on things such as:

• the type of business that you run,

• the industry you’re in,

• and your credit rating.

However, if your business plan is solid and shows the loan officer how quickly you will produce revenue and break even, you may be able to get financed by a bank. In many cases, businesses use credit lines to manage their cash flow, and business loans to make large purchases such as equipment.

Most businesses will use a mixture of financing instead of depending on just one source. For example, as a start-up you might invest your own money for market research, then pitch investors to invest in the early stage of the company and then obtain a loan from the bank to purchase equipment. Once your company has grown, you may approach venture capitalists to finance your expansion into a larger company.