If you dream of opening your own business, you need to have a great idea for an innovative product or service that fills a gap in the market. You also need to be prepared to put a lot of time and energy into planning to launch your company. One of the most important elements to consider when detailing your business plan is how you plan to secure financing. There are several ways to obtain the financing you need, and they each have advantages and disadvantages, so you should carefully consider the needs of your company before deciding which avenue to pursue. Here is what you need to know about five popular financing solutions so you can decide which one is best for your company.
Venture Capitalists
There are many venture capitalist firms in the United States. These corporations finance companies that have a high probability of success. Every venture capitalist such as S-Cubed Capital’s Mark Stevens has his or her own portfolio, which is a collection of diverse businesses he or she finances. If you choose to approach a venture capitalist for financing, you should do some research to make sure your company would fit in his or her portfolio. For example, if your business is in the retail industry and produces STEM toys for babies and toddlers, you don’t want to approach a potential investor who already finances three other similar companies. Look for people who don’t currently have a business in their portfolio that is similar to yours.
Partnering with a venture capitalist is a great way to make business connections that will allow your company to grow. The investor you choose to work with likely has more experience in the industry than you do and can serve as a mentor. However, this expertise and guidance come with a price. You will most likely have to give up a share of your company or agree to pay the investor a royalty fee in exchange for funding.
Bank Loans
Bank loans are one of the most common types of commercial financing. There are many types of bank loans to choose from, and while some are designated for specific purposes such as equipment financing, others are flexible and allow you to use the money you receive in any way to enrich your company. You can obtain this type of financing from banks, credit unions and private financial institutions, so it is one of the most accessible financial solutions available. Some types of bank loans include:
- Stated income commercial real estate loans
- Merchant cash advances
- Equipment loans
- Small business loans
- Purchase order loans
- Franchise loans
The disadvantage of bank loans is that they can be difficult to qualify for. You and your business typically need to have an excellent credit history to qualify for financing through a bank. This makes it difficult for new businesses to obtain bank loans, but there are a few types of bank financing that will lend money to startups provided that the owner has a decent credit score.
Websites for Crowdsourcing
Although crowdsourcing is a relatively new type of financing, it has proven to be effective for many businesses. You simply create an account on a crowdsourcing website and share the link with your friends and family members, who can then send the link to people they know. This link explains your vision for the company and shares your products or services while asking for donations. These donations provide you with the financing you need to launch the company. However, you may not raise the amount of money you need and some donors expect small gifts in exchange for their hard-earned cash.
Savings
If you have a lot of money in savings, you can use it to finance the startup yourself. This gives you complete freedom over how you grow the business and use the money, but it is a risky venture. Even if you give the company everything you have to make it successful, it could still fail within a few years of launching and leave you with nothing.
Angel Investors
Angel investors are similar to venture capitalists but they are usually entrepreneurs themselves. Rather than working for a firm, they finance startups with their own money. They usually invest a lot of time and effort into making your business successful but you may have to exchange a significant share of the ownership in your company.
Because you’ll need a way to finance your business until it starts turning a profit, you need to start thinking about which avenue of financing you will pursue before launching the company. While there are several ways to secure the financing you need to operate your company, you need to weigh the pros and cons to decide which one can help your business reach its full potential. Consider these five financial solutions to help your business thrive in the competitive marketplace.
