Life of an entrepreneur is a constant struggle between bliss and misery. Sometimes, startup founders are exuberant about the latest milestones they achieved; in other times, they find themselves in a constant state of panic as they are trying to solve another problem that might just end their venture. One of the most difficult and painful problems to deal with is financing. Here, we discuss the major ways that startups can fund their operations, and what type of fundings are appropriate for different situations.
Launching a New Company
For budding entrepreneurs who have not yet launched their own companies, funding options are unfortunately quite limited. The most well-known venue is to receive funding from venture capital firms. To actually raise capital from VCs and angel investors, you have to demonstrate that you have built a credible career, expertise, network and track record to prove that you have what it takes to make your new venture successful.
The key is to prepare a detailed plan of action to showcase why your strategy and product will succeed. Even better, creating a minimally viable product to test the market on your own could help convince VCs that you are serious about this venture and that your idea actually has a decent chance of success. Getting VC funding is a difficult process that requires an extremely thorough preparation, and an incessant process of pitching and networking.
For most people, however, raising money from VCs simply will be too difficult and likely won't be an option. Instead, most will have to resort to using their personal savings as well as asking friends and families for investments. But, there are also some other options like Kickstarter, where you can raise some amount of money to help your idea get off the ground by getting pre-orders.
Firms that have had a bit more progress should also explore leveraging online crowdfunding platforms like Fundnel and FundedHere that provide a variety of financing options like equity and even revenue sharing. The important step is to get the minimum amount of money you need to at least kick the ball rolling on your project; once you begin to show some progress, investors will be much more like to lend you a hand.
Cash Flow and Working Capital Troubles
Finance can be a headache even for startups that are already in operation. The most common of these pain points often has to do with cash flow. For example, many companies have to first spend the money on rent, staff and material costs to create their products before they receive even a dollar from their customers. To exacerbate the situation, some customers will opt to pay 30 to 90 days after they have been invoiced. Startups could find themselves with a rapidly declining cash balance even while they are growing just because their immediate cash outlays are growing faster than cash inflows.
In such situations, startups and other SMEs can turn to invoice financing or short-term business loans to fill the gap between when they spend money and when they receive money. For example, platforms like Funding Societies and MoolahSense allows companies to trade in invoices that they've issued in exchange for a short-term loan of up to 80% of their receivables. By doing so, SMEs that have a significant amount of invoices don't have to wait to get the cash they need immediately. While their interest rates can be a bit costly, their actual total costs in terms of dollar amount are relatively small since they tend to be very short-term (1-6 months).
Major Growth Initiatives
For relatively established startups that seek capital to fund major growth initiatives, there are couple of different options. First, they could opt to get a long-term loan. Companies can take business loans or corporate bonds to finance any projects that they deem appropriate. Though these financing vehicles can compress the firm's profit margins, they allow businesses to accelerate their growth by pulling forward some of their future earnings for a relatively low cost. Both commercial banks and private equity investment firms are known to provide these types of fundings, while there are also some online players that also deal with this types of methods.
For those whose profit margins can't easily accommodate the added pressure of a loan, they can opt for alternative financing methods like equity financing where they sell a portion of their business ownership to investors. VCs would be the most obvious source of these financing, but online platforms like Fundnel also provide a venue for equity fund raises, as well as other alternative methods like convertible bond, revenue share and debt.
For specific types of growth projects that require firms to purchase equipments that they don't currently own, firms can turn to asset financing as a source of capital. Asset financing is a type of loan that is specifically given only to borrowers who already have work orders signed and only need additional equipments to fulfill the order they received. Due to this nature, these loans are deemed less risky and tend to be cheaper than other loans. While traditional banks are also known to provide these types of financing, smaller firms that do not have easy access to commercial banks can turn to online players like KapitalBoost.
It's All About Tradeoffs
Overall, you should assess what type of funding is the most appropriate for your circumstances. Short-term problems tend to be best addressed by short-term debt, and vice versa. While younger companies tend to be limited to equity financing, more mature andand bigger firms should assess whether equity will be cheaper than debt. In a bubble market where VCs are willing to invest at extremely high valuations, equity could be a cheap source of funding. If the founders have a high confidence in their growth prospects, issuing debt could be more economical.
When it comes to finding capital to help your company stay afloat and develop, it is important to remember that no one type of financing is always the best. For example, turning to famous VCs could help raise the profile of your company and get you valuable connections without reducing your profit margins. However, it will also cost you a sizable portion of your ownership, and also bring on an incredible amount of pressure to grow your company in a very short period of time. On the other hand, loans could be "cheaper" than equity since you get to maintain all of your profits to yourself, but it's only available for firms that have predictable level of profit that can satisfy the debt's stringent repayment schedule.
This was first published at Value Penguin's website, "3 Ways Startups in Singapore Should Assess Different Financing Options".