The cost of goods, labor, and services has put many businesses in a tough spot as they head into the new year. If you’re worried about the future of your startup, you aren’t alone. In a recent Forbes survey, 50% of those polled stated they were worried about the survival of their business.
Before you click on that loan application to make sure you have the money needed to ensure the success of your startup, it’s time to do some research and weigh all the options available to you.
With so many different funding options out there, there’s no right or wrong way; it's just a matter of finding the best fit for you and your business plan. We’ve put together some questions you can ask yourself as you move forward on funding your startup to make sure you make the best decision!
1. What are your needs?
A startup, by definition, is a company that seeks to bring something entirely new to its target market. Innovation is the name of the game, which means every startup is different, leading to a different set of needs based on their industry, size, and how long they’ve been in business.
If you’re in the early stages of your startup, you may need to act quickly to bring your new idea to fruition by paying for the development of your app, service, or physical product before someone else does! Your needs are more time sensitive, which means you’ll need a fast way to obtain the necessary funds to pay employees, get hardware, or cover manufacturing costs.
Do you have your product ready to go, and need a way to scale quickly? Chances are you’ll need a larger amount of funding than you’re able to obtain from a bank if you don’t have the revenue required to cover payments. Alternative funding sources will be your next step if this is the case.
Take stock of your immediate needs and the subsequent steps after you get the funds necessary to help you decide on how much money to apply for and where to get it from. If you’re worried you’ll make a poor decision, it’s often beneficial to have a business mentor who can help you look at your venture objectively and assist you in making decisions for the future of your company.
2. How much money do you need?
The amount of capital you need to raise depends on a few factors. First, and most importantly, you need to consider the size of your business. The larger your company, the more capital you’ll need to operate. You may have more overhead and will need to generate more revenue to carry your startup to the next level of success and guarantee sustainability.
A good way to figure out how much money you’ll need is by calculating your startup costs. These can include opening inventory, acquiring a physical storefront, hiring employees, and so on. Most businesses require at least $50,000 in startup capital or loan amounts and, in some cases, will require closer to $500,000.
SBA-guaranteed loans are based on many different factors depending on the size and length of the loan. If your startup is smaller, a microloan may give you the boost in capital needed to pay for marketing campaigns or obtain software to assist your team with day-to-day operations.
It’s important to make a plan for every dollar you obtain and have another plan for how you’ll pay back any loans you take out in the business’s name. Different types of loans have different repayment terms and interest rates, which can add to the mounting concerns business owners face, so make sure you can actually afford to take on more funding!
3. Who will be funding the startup?
Once you know how much money you need and what it’ll be used for, now it’s time to find the source. Depending on the amount of funding you need, you’ll have to decide on the best person, entity, or bank to talk to.
Friends and Family
If you’re comfortable with asking friends and family for funds, this could be an option for you – especially if your startup is being run by a small team, or just yourself. Don’t forget to consider the effect transactions of this nature can have on relationships. If their investment doesn’t bring returns as large or as quickly as everyone expects, friendships and family connections can soon become strained at best.
Make sure everyone is made aware of the risks they enter into when investing in your startup, and draw up legal documents that cover every eventuality you can think of. Will you be offering equity in the business, or a specific percentage of the profits once your startup becomes established? Put everything on paper and disclose what the money will be used for to keep everyone on the same page so they know what to expect going forward.
Angel investors are a great source of funds if you’re looking for not only monetary support, but also some expert advice in the industry you’re breaking into. Angel investors typically request a specific amount of return on their investment, so go into interviews with a realistic number in mind to make sure you retain enough profit in-house for keeping the business going as well as paying yourself and any other employees.
Venture Capitalists (VCs) or Private Equity (PE) firms are also options to get the capital you need, but you’ll need to make sure you fully understand how each one works and the risks you could face by involving them in your startup. Typically, they have much more say over what happens with the company, and you may be locked into longer partnerships; so it’s important to review their strategy before beginning the application process.
The great thing about working with private investors is that you don’t have to meet any credit requirements, and you won’t have to worry about interest rates. Plan on the possibility for VCs and PE firms to be pickier with who they take on and how much they invest due to changes in the economy.
4. What is your exit strategy?
It may feel like the day will never come, but eventually, once your startup is established and successful, you may decide to move on from what you worked so hard to create. After months and years of making decisions and putting in hard hours to get your idea off the ground, burnout can be a significant factor for startup leaders. It’s ok to want a refresh and pick up something new!
It’s important to have a tentative exit strategy to make sure your leaving doesn’t interfere with the operations of your company. There are many options to explore, including selling, passing leadership off to another trustworthy person in the business, or even dissolving the company once you’ve decided to discontinue the venture.
Any monetary decision made now can dictate how you exit or sell the business later, so create plans now to enable smooth transitions later on.
It might seem hard to start a company, but if you know how much money you want to borrow in the form of loans or investments, and what you want to do with the company in the future, it doesn't have to be. Explore your options, run them by a trusted advisor and take the leap! You never know where the next decision can take your business!