Do you have a business idea that you believe would bring in profits? Whether it is a new solution or a modified brand of existing solutions, you need money to get your startup off to the world.
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While you can put in your money and get personal loans from family and friends, you still need to get financing from other sources. Substantial working capital is crucial if you want your small business to grow.
However, the race for startup financing can be long and arduous. It is even scarier when you realize that 75% of founders don’t make any profit when they sell their business. But, the other 25% must have something going for them more than luck.
This article will point out some of the things you need to consider as you try to get startup financing. You will also get some ideas on where you can look to get business loans.
5 Key Things You Need to Know About Startup Financing
Getting financing for your startup might be a long ride, but you can get investors interested with the right moves. It also goes beyond getting the loans or small business grants that put you on your feet.
Investors and loan firms are usually tight-knit groups. When you go unprepared, your name might be mentioned in another meeting, disqualifying you from speaking to others. So, you want to have the right arsenal before you start anything.
1. Start With Your Money
It is excellent that you have a good idea with a plan for how it will work. But that plan is not enough to get you the line of credit you need. No serious investor would give you money to put in a business that you have not tried out with personal funds.
Your ROI calculator should not be from made-up figures alone. It should be substantial proof that you can make the same return on a bigger scale for your investors and show faith in your product. However, this money doesn’t necessarily have to come directly from your pocket.
You can get love capital from your friends and family. You should, however, be careful of this source of capital as it can get messy. Ensure you have a solid agreement with the parties involved before using these personal loans.
2. Know the Market
What is the size of the market? Will people buy this product, and why would they? Do you know the market for the service or product you want to offer? These questions need to be answered and cleared before you approach any investor, or you won’t look serious to them.
Knowing your market would also help you secure funds for your startup. Most entrepreneurs start up small with personal funds and then grow their small business to a bigger company. The funds help to scale the business to a global level.
However, securing funds for a small business can be an uphill task. Small business funding solutions want to know that you have a market for your product. If you can show the demographics of the people expected to buy your products, it gives credence to your business. It would help if you also showed that your concept could gain good traction in this market.
If your business concept can’t gain the traction or scale that business loans warrant, you should not take the idea to investors. Investors want to put their money in ventures that can scale to become giants in the market. Therefore, understand what the market holds for your business before you reach for loans.
3. Understand Equity
Before you sign any contracts or open that business account, you should understand equity financing. Some investors would prefer to have an equity split. It would help if you understood how equity works and how it might affect your startup.
If you already have a co-founder, you should draw up a capitalization table showing who owns what in the company. You can quickly draw this table on an Excel sheet. Vesting should take place in four-year periods to deter dead equity.
You also understand that you might lose some control over the startup as equity builds, depending on your position. Your wealth might increase from the startup, but you might lose some of the control you had.
4. Plan Every Move
You can open a bank account online and get online loans, but you need more than easy financing to make your company a success. Don’t forget that the funds are for your business, not the other way round. It would be best if you had a plan for utilizing every amount you get.
This plan is essential in your first year. According to the US Bureau of Labor Statistics, 20% of new businesses fail in their first year, and the number keeps climbing as the years climb.
Therefore, you need a proper plan with milestones to ensure that your company succeeds. Set metrics that challenge your scope and act as a marker for how far you have reached. A detailed budget and plan for your financing also go a long way in convincing investors.
5. Have an Exit Strategy
Investors put money into your business for a reason. Unlike your family and friends who want to see you succeed, investors offer these loans to get profit in the end. Therefore, having a clear exit strategy for your investors will show that you understand their minds.
You should show your projection through your pro forma financials, ROI calculation, sensitivity analysis of essential variables, and cash sources and uses report. You can show investors exactly when they can expect dividends from their investment through these financial reports.
After some years, you might also want to design an exit strategy for yourself. Most founders often relinquish their role as CEO after about 10 years of growth. You might also want to turn your attention to other aspects of your life once your small business has grown.
Have an exit strategy that covers this move and makes the transition easier. You should also review your strategies monthly and annually. Many circumstances have shaken small businesses that don’t take time to review. Always go back to the drawing table to ensure everything is in its rightful place.
Startups are not for the faint at heart, and financing solutions is one of the areas that will test your patience and resolve. However, you can stay the course and get the small business financing program you need with the right advice. Use the key points that we have provided above, and you will find the financing aspect of your startup plans going smoother.