Having sufficient funding is vital to launching and growing a startup. If you want to move beyond MVP and scale up at full potential, having the right set of resources becomes critical. This piece will discuss some of the most popular startup funding types. Ultimately, you should be able to decide on the funding type that suits you.

Checklist Before Finding Funding:

Everything needs to be perfect and organized before you start looking for finance options for your startup.

1. Fundraising Goal:

When you aim for funding, specify your objectives to satisfy the investor’s questions about the utilization. How much do you aim to raise, and where will you spend that? You can’t change the amount you need after you have pitched your idea, so you need to be precise and know the stage of your Startup. Assigning a person to be in charge of this process is a good idea because you will have a lot on your plate, and you will need someone to do the research and narrow down the amount that will fulfil your business’s needs.

2. Traction Number:

Business traction is an overview of your startup journey and growth so far. You have to provide investors with some key numbers and indicators highlighting the product market fit and future perspective/prospects. It will help you show your Investors how your Startup is progressing and why they should invest in your Startup

3. Financial Model:

To get the desired level of funding, you will also be required to share a foolproof financial model. It should also provide future projections based on the assessment of your financial statements (balance sheet, income statement, etc.).

It will help your investors get the whole picture of your Startup, and you will be able to score the investment you wanted. If you don’t have financial modelling knowledge or are just starting and can’t hire a professional financial modeling expert. You can opt for online consultants who can help you with this process and provide you with the Financial Model you need.

4. Perfect Pitch:

Having the right pitch deck to explain your business, plans, and investment requirements is another must-have element. You should have precise information with visual aid and the financial model of your Startup. It would be best if you had a clear and straightforward idea to present to the investors, and it shouldn’t be too long. Get the idea across quickly, and no one these days has time to attend a long boring presentation. Selling the idea is a significant part of the process, and with all the essential items in your presentation, you will be able to achieve that in no time. 

5 Practical Options for Startup Funding:

Financing your Startup is one of the most critical steps, and it will either make or break your business. There are a couple of options to fund your Startup, and we will be getting their Pros and Cons, so you have all the information you need to start finding the Funding for your Startup that best suits your needs.

1. Debt Financing:

As evident from its name, debt Financing is borrowing money to fund your business, whether you are just starting or need funding for your working capital. Setting the time frame on which the money will get returned and the interest on the funding begins in the initial process.

There are two types of debt funding: Short-term and long-term. And this depends on the state of your startup as mentioned above. If you are looking for financial help to deal with day-to-day expenses, then you will be looking for short-term startup funding that is paid back in a short period. However, if you are starting and need investment to start running your business, equipment, employees, and marketing expenses, you will need long-term investment. The time frame for paying back the funding is longer, so you can pay the debt after your business has started to bring in revenue.

Pros of Debt Financing:

-Control Over Your Business:

The primary reason founders prefer debt financing is to maintain business control. Moreover, since there is a pre-decided payment framework, it helps plan strategically for each milestone.

-Tax deduction:

Who likes Taxes? The answer to that one is NO ONE! This Funding option will help you with tax deduction on your interest payment. With the help of it, you will be able to stand lower on your taxes, and the interest will also reduce.

–Increases Business Credit:

Credit store plays a vital role in the growth of your business you grow. With this option, you can record your payment history with your lender, which will build your credit score and help you acquire any funding you might need in the future without any hassle.

-Easier to Obtain:

It is easier to obtain when compared to other ways of Startup Funding. You won’t be competing with other businesses to get your startup funding and won’t have to go through an extensive, time-consuming process. Instead, you can utilize that time and energy to get your business on the road. .

Cons of Debt Financing:

-Risk of  bankruptcy

You will have to sign a guarantee to get the loan, so if you cannot repay the lender, they will have ownership over your assets.

-Hit on your Revenue:

You will be paying back the loan from the income of your business which takes a hit on the cash flow.

Angel Investors:

Angel Investors are Individuals or establishments interested in investing In startups with good ideas and potential. In exchange for financing, the investor gets a percentage of equity in the business. There are a lot of angel investors out there who want to be part of raising startups, and they help these startups with their experience and how they can improve their strategies and expand their business.

Pros of Angel Investors:

-Stake in the Business:

As the Angel investor has a stake in the company, they want what’s best for it, and they will help you in any way they can with their resources to grow your company. They have more experience and insight into the business world, which is a significant advantage for you.

Since angle investors have stakes in the company, they would want the best for it. In this regard, they will provide all possible help to support your growth initiatives.

-No Collateral:

You won’t have to worry about signing off your assets to them as there is no collateral in this funding. If the business takes a hit, you won’t have to worry about making your next payment. Instead, you can focus on getting back on your feet with the help of your Angel Investor.

-Business Acuity:

Usually, Angel investors come from a business background, so having someone with experience and insight on running a successful business is always a plus. Especially if you are new in the business world, you will need all the help you can get, and with Angel investment, you will be able to ask for help when you get stuck or run into a problem.

Cons of Angel Investors:

-Can’t Call the Shots:

The primal reason behind the dislike of angel investors is that you won’t have complete control over your business. You can’t call the shots as the company is not all yours. A part of it belongs to the investor. Therefore, whenever you are looking for an angel investor, you should choose individuals or companies with experience in the domain you are working with to have a common ground.

-Acquire Larger Equity:

When it comes to Angel investors, they don’t invest in your Startup unless you are willing to sign off a large percentage of your company. It varies from 10% to 25% and can be as much as 40% of your company. (Hub, n.d.)

Venture Capital:

Venture Capitalist is usually a company or an individual who invests in a startup in the initial stages and has some outcome. They invest in Startups that have High-potential and High-risk as most of the Startups that have fast growth initially have a high risk of failure.

Pros of Venture Capital

-Larger Sum of Investment:

Venture Capital provides a more significant sum of investments to the Startup compared to angel investors. So if you are looking for a larger sum of cash infusion for your startup, you will need a Venture Capitalist instead of an Angel Investor.

-Provides Expertise:

Startups with high potential need the knowledge and expertise to succeed as they risk failing. Venture Capitalists look through your Startup from top to bottom and give you the advice and resources you need to maintain the potential of your Startup.

-Collaboration opportunities:

Venture Capitalists have more resources and connections than someone just starting. You will get to collaborate with people from the industry with the help of the Venture Capitalist and soak in all the knowledge and tactics of running a successful business.

Cons of Venture Capital

-Lowered Stake:

As the Venture Capitalist will buy a percentage of your company, you won’t be the company’s sole owner. As a result, decision-making won’t be just up to you and you will have to coordinate with the  VC to move forward with any decision concerning the company.

 Crowd Funding:

It is what it sounds like, Crowdfunding is when you get funds from different individuals. Crowdfunding occurs through online virtual platforms such as GoFundMe, LendingClub, and INDIEGOGO. You can opt for the one that is best for your Startup.

Pros of Crowdfunding:

-Getting Feedback:

Crowdfunding can be an excellent way to test your startup idea. Before you invest in development and go-to-market efforts, get feedback and funding for your idea on such a platform.

 

-Marketing of your business:

As you will  boost your business idea through different platforms for potential investors, you will simultaneously get the word out there. With CrowdfundingCrowdfunding, you will be exciting your business which will be beneficial in the future.

Cons of Crowdfunding:

-Fraud:

As it is a reasonably new medium in the Financing world, there is a potential of being scammed. This is why the investors have become a bit hesitant over funding the startups, which means that it might take some time for you to find the right investors.

-Negative Feedback:

Your business will be in the public’s eye, and your customers and investors can see the progress. If you cannot meet the deadlines or have a negative outcome, it will affect your business’s image, and you might have difficulty finding Investments in the future.

 

Family and Friends Funding:

When it comes to funding a startup that hasn’t anything to show for it yet and is in the starting stage, most entrepreneurs getfunding from family and friends. So, why not if you have people with the assets to loan you the money you need for your Startup? It is more convenient and hassle-free, but it comes with its problems.

Pros of Funding from Family and Friends

Flexible:

Compared to Banks, you won’t be pressured to repay the investors on a specific date when it comes to Family and Friends. Instead, you can start repaying them after your business has enough revenue.

No-Interest:

It varies among individuals, but family members or friends usually don’t ask for interest on the money they lent you for your Startup. This means you won’t be giving any extra money to them, just the amount you borrowed.

 

Less-Hassle:

Securing the funds for your Startup can be exhausting and tiresome when you approach Angel Investors or Loans from a Bank, especially in the earliest stages of your Startup. However, the advantage of getting funding from your family and friends won’t take as long, and you won’t get frustrated when you are starting a new journey.

Cons of Funding from Family and Friends

Limited Funds:

Compared to million dollars cooperations and banks, your funding will be limited, and you might have to look for other funding options.

Hit on Relationship:

If things don’t go well and there is a rough patch, your relationship might take a hit. If you feel overwhelmed by putting your idea out there and want to talk to a professional to discuss your business and prospects, we have it all for you.

At Numberly, we are committed to helping founders with the financial plans of their businesses. If you are facing some issue with financial planning, budgeting, or modelling, feel free to schedule a no-obligation consultancy call with our experts.