For a small business owner or entrepreneur, a good product idea or service — and the drive to succeed and put in the hard work — is a good starting point to building a business, but there is one thing that you will absolutely need: capital. Without money and the necessary financing, a startup can quickly lose its momentum and find itself unable to meet the financial needs and goals that you have set.
So what’s the best way to support your business and ensure that you have the opportunity for growth and success? One possibility is to look for financing prospects. Another is through acquisition. Each option comes with its own benefits and drawbacks. Read on and learn which choice is best for you.
Financing Your Startup
Business startups can have a tough time raising capital. They are often considered too risky and do not have a proven track record that many lenders can trust. Low amounts of cash and an inability to raise more money can bring an end to any venture before it’s had an opportunity to get off the ground. Many times entrepreneurs and business owners tend to rely on their own personal resources to help finance their dreams by tapping into savings, home mortgages or retirement accounts. Though these tend to be the most common avenues of funding, not all startup entrepreneurs have this resource option available to them. There are, however, other alternatives to grow a startup. These are the most common ways to finance your startup, along with the potential benefits or downfalls of financing.
Bank Loans. Banks are in the business of making money, and if your business does not already have an established relationship with a bank, loan terms will be heavily slanted in the favor of the bank. Remember, as previously noted, banks would be risking their money on an unestablished business with no history of sales. This will limit the amount that you can borrow and also increase the rate of interest on your loan.
Lines of Credit. We’ve all heard the stories of how some startups began in a basement or garage and used credit cards as a primary source of funding. But the option of using credit cards can be a double-edged sword. On the one hand, credit cards can provide you with money and build your credit. On the other hand, credit card debt comes at a high price, with interest rates averaging nationally at 16 percent, which can eat away into your future profits. According to the consumer credit reporting company Experian, the average credit card balance is $5,315, with small business owners carrying a lot more debt.
Trade Equity. Cash may be in low supply, but you can offer shares or a stake in your company if you receive support from employees, advisors and even investors willing to foot the bill while you get your business in gear. Another option is to reach out to angel investors or venture capitalists (explained further down the list).
Support from Family and Friends. Many small businesses get their start through the support of friends and family. A way to do this is through crowdfunding. Popular crowdfunding sites for businesses include Wefunder, Indiegogo and Kickstarter. You can also drum up interest in your business by tapping into social media.
Startup Accelerators. Companies like Airbnb, DropBox, Twilo and thousands of other businesses got their start from seed accelerators such as Y Combinator, Techstars, Coplex and Dreamit. Other businesses use startup accelerators — also called incubators — if they have a specific innovation or product they need to fund and will take their company in a new direction. To gain access to this type of funding, you’ll need to apply and get approved. If your application is accepted, accelerators can support you through seed money (in exchange for an equity stake in your business), mentor programs, and networking. Startup accelerator programs can last 3-6 months or longer, depending on the program that you apply for.
Venture Capitalists and Angel Investors. Angel investors are typically high net worth individuals who fund a startup with their own money. They are typically seeking a high rate of return on their investment, such as ownership or equity of the company. Unlike the financing that you receive from friends, family and angel investors, venture capitalists do not use their personal wealth to help support your startup. This group consists of investors or groups of investors that operate under an LLC that provides money for a financial stake in the startup for an expected high rate of return.
Pros of Financing:
Bank loans and credit cards can provide you with an immediate infusion of cash to help fund your startup.
Having financial support from family, friends and angel investors helps confirm that you have a good idea worth people's money and resources. This source of support can expand through word-of-mouth and even help build your client and customer base.
Trading equity in your company with employees and professional investors and venture capitalists also shows that your business has value and that others see this and want to participate in your potential success.
Cons of Financing:
Bank loans and credit card debt may come with limits and high interest rates that will eat into your bottom line.
Relying on friends and family to help support your business may affect the dynamics of your personal relationships. (Make sure to set guidelines and manage expectations.)
Outside investors like venture capitalists will have terms and conditions when it comes to providing the financing that you will require, including owning a percentage of your business and involvement in the way your business is run.
There is risk and reward in each of these capital-raising options. But having the funding and resources to help support your startup gives your business a fighting chance to succeed and grow.
Startup Growth by Acquisition
Another option for receiving funding is through having your startup acquired by another company. Even if you hadn't entertained the idea when you started your business, knowing that there are other interested parties looking to buy your startup is a sign that you have the makings of a strong business. So how does this option work, and how would you engage a prospective buyer?
Some startup business owners may use the acquisition process as an exit strategy to cash out and start the process all over again. But if you are not a serial entrepreneur and want to remain engaged in your business, the process breaks down as follows:
Know who the likely players (acquirers) are in your market and build on those relationships.
Know where these potential acquirers are going with their business strategy and see if you share the same vision.
Get ready to negotiate and know your position. For example, are they going to buy you out or will they partner with you? (That will depend if you want to take the money and run or use the opportunity to grow out your business.)
If the acquisition is more based on fundraising and partnering, then your involvement will still be in play and you will remain a part of the business that you started with the financial backing to keep you going. Still, there are pros and cons in taking this approach.
Pros of Acquisition:
You can increase your market and reach by partnering with another company. This will give you access to their clientele and may even help expand your portfolio through cross-selling opportunities.
You will have an opportunity to benefit and learn from the success of your acquiring partner.
You will have access to a shared talent pool, resources, networking and other synergies.
Cons of Acquisition:
There are potential culture clash concerns, miscommunication issues and role integration confusion.
What once may have been just your idea is now shared with a larger group with interests and opinions in running your business.
You need to learn to work with others and become a part of a larger organization.
The positive takeaway for going through an acquisition is that you now have the financial resources needed to ensure that your startup has a fighting chance. Seeing that this was the end-goal to help achieve financial stability for your startup, an acquisition may provide a quick boost of capital increasing your odds for success.
How to Grow a Startup
When you're expanding your business, addressing capital concerns can allow you to get the help you need and shift your focus to conducting business. Money will be the lifeblood of your startup and you'll need lots of it even before your business can start generating its own revenue through product sales or service charges. Once that concern is addressed, you can move ahead with the business of, well, doing business.
Running a successful business takes a lot of work. The proper advice can help ensure that you are heading in the right direction. Once the funding has been addressed, you can move on with your business strategy, including marketing, advertising, networking and other business development opportunities that will help bring in clients, build your customer base and expand your business.
Peter Mavrikis is an author and editor with over 25 years of experience in publishing. He has worked as the Editorial Director for Barron’s Educational Series, as well as Kaplan Test Prep, where he ran the test prep, foreign language, and study guide divisions. Peter has also written several books on history, exploration, science, and technology.