The most common mistake about funding a startup is that it just affects where your money is coming from. Nothing can be further from the truth. You see, funding a startup also determines your break-even point, the interest rate (which is added to your enterprise’s overhead), the liability, the business structure and much, much more. This is why it’s so important that you choose the right option. In order to do so, you first need to get informed on the subject matter. Here are some of your options.
1. Personal funds
The most common mean of funding a startup is doing so from your own personal funds. The way this works is fairly simple. You can use your savings, sell an asset in order to get the funds or even raise a personal loan to do so. What matters is that by doing so, you will expose your own wealth to any potential outcome (be it success or failure). It also means that you will be completely in charge of the company (no investors, shareholders, partners, etc.). If you’re going for a loan or plan to rebuy the asset that you’ve sold, you still have a break-even point. However, the circumstances are far laxer and in your favor.
2. Loans from friends and family
About 38 percent of all startups are funded by friends and family of the entrepreneur. The best thing about this is the fact that you don’t have to fill in paperwork in order to get the money. Also, you have more flexibility when negotiating the terms of the loan. The bad thing is that your friends and relatives may not have the kind of money that you need. Second, in a scenario where you’re unable to pay them back, you’re actually risking a personal relationship. All in all, this idea is not that great as it may seem.
3. A business loan
One of the first ideas that will cross your mind is one of applying for a business loan. For this to work, you need to have a business plan, a list of start-up expenses and a financial projection. All of these need to be drafted carefully and by someone with authority. The more detailed you can do so, the better. For instance, when listing all the equipment that you will have to acquire for your lab to become functional, you need to list item by item with their expected costs. Just listing lab equipment as the item is not enough, what you need are separate items like vaccine fridge, glassware, etc.
4. Finding a partner
The next idea is the one of finding a partner. First of all, this gives you someone to share expenses with. Second, it provides your business with a different business structure, which reflects on the way you pay taxes, as well as the liability that you personally have for the performance of the business. Third, it gives you someone to share administrative tasks with, which is a huge weight off your shoulders later on. Just keep in mind that finding the right partner is not a simple task. It is far more important to find someone who you share a vision with than to pick someone who shares your interests.
Of course, there are numerous other methods of funding your startup. Honorable mentions go to crowdfunding, finding a venture capital company or finding an angel investor. Still, you need to understand that the way you fund your business actually affects future equity in the company, as well as the control that different parties may have over it. This is why it’s so important that you take all the pros and cons into consideration before making the commitment.
Guest article written by: Ayla Anderson is an avid reader and an enthusiastic blogger who writes articles on home improvement, business, Family and beauty. She is also an MBA student who spends much of her time giving advice to newly small businesses on how to grow their businesses. You can follow me on Twitter