Types of Startup Funding

23 Jan 2013

Startup FundingUnderstanding the mechanism of funding and identifying modes for investment is something that all entrepreneurs need to do. There are a wide variety of funding options on offer and the onus is one the entrepreneur to identify the best fit for their venture. Be it debt or equity, businesses need to take a look at all the financial options, understand their advantages and limitations before embarking on any of them. Self funding and government grants can also help during the initial phase as described in below.

Debt Financing

It is typically a loan or line of credit that comes with a repayment schedule and an interest rate. New small businesses are funded with debt financing by banks or other financial institutions. These financial institutions look carefully at the company's cash flow, collateral, and asset liquidity. An entrepreneur must have a sensible, written business plan and a deep understanding of the businesses financial requirements. Debt finance has to be repaid with interest and no equity dilution is required.

Equity financing

Thousands of businesses are financed each year by private or "institutional" investors in exchange for equity in those companies. These range from the simpler "friends and family" type, to high net-worth private investors known as "angel investors," and all the way up to the professional investors called "venture capitalists":

Bootstrapping

Bootstrapping means you fund your startup on your own. This term refers to a company owner who decides to solely fund their business on their own without depending on outside sources for financial support.  It means to scrimp, save and squeeze and use the minimum resources you can use. The principles behind bootstrapping is watching every penny, weighing spending options versus return on investment, doing more with less. It is about have merit regardless of your funding situation. In this type of funding, the entrepreneur often evaluates all of his/her assets, including personal savings accounts, credit cards, equity in real estate, retirement accounts, vehicles, recreational equipment, and even collectables. Companies that raise lots of money often tend to overspend and in the process tend to spend poorly; in essence, they forget about running lean & mean. The trend is in small angel/seed financing rounds to help kick start the companies.

Grants

There are often a variety of government grant programs for specific types of startup businesses. For more information, online searches on government websites need to be conducted. While grants are rarely required to be paid back, accountability is higher, with outcomes to be delivered  within a difficult deadline to meet. 

 

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