How to get funds for a high potential startup idea?

How to get funds for a high potential startup idea

If you are an entrepreneur and have a startup, you should know that a lot of capital is required to grow your business, but if you are just starting, do not despair that there are always several options available.

The important thing is to know which one to choose for the moment your company is. Without a doubt, the best option to get liquidity is through sales, but what happens is that when you need to scale your business internationally, a lot of capital is required.

The traditional banking system requires that a company have at least 1 to 2 years of operations to have a history of economic behavior. Therefore, a bank loan is not an option in the initial stage of a company and it is necessary to look for alternative sources to finance growth. If you have one of those companies, this article provides a comprehensive guide to the tools and options at your disposal.

One of the most common questions I get as a startup mentor is: “How can I find the money to grow my business?” I always answer that there is no magic whatsoever, and contrary to popular belief, no one is waiting to give them the money just because they have a spectacular new business idea.

On the other hand, there are many creative options available to start or grow your business. If you are an entrepreneur, I encourage you to seriously review each of the 12 financing alternatives that I present in this article, to see which is the one that best suits your needs.

Of course, each alternative has advantages and disadvantages, so some of them may not be an alternative. For example, investors place a high priority on the experience of the founders before starting the venture and hope to own a part of the business assets, some even want to have control of the funds they provide.

Therefore, it is always a question of balance between what you need and what you are willing to give up, to turn your spectacular idea into a viable business. Here’s my list of today’s 12 most common sources of funding, in reverse order of priority, with some general rules of thumb for channeling your approach:

  1. Family loans

If you want to keep things ultra-simple, a trusted family member can provide an unbiased, willing, and reliable source of loan financing. Family members, loved ones, and friends are more likely to trust you with their money than to give it to a stranger, and will surely demand lower interest rates than a financial organization. Generally, the amounts are smaller so it serves for an initial stage. Of course, there are some drawbacks when it comes to mixing family and finances, so it’s worth weighing both the pros and cons before asking a family member for money.

  1. Microcredits

If you only need a small amount of money, you can think of a microloan, which is tailored to your circumstances and can be used in conjunction with funds from other sources.

Many companies offer microcredits; For example, fintech, microfinance companies offer between the US $ 1,000 to the US $ 5,000 with short repayment terms and reasonable interest rates.

  1. A bank loan

If your business is 12-24 months old and has a defined cash flow, it may be eligible for a loan from a financial institution, in some cases government-backed. These are unsecured personal loans of up to the US $ 15,000 that must be used for business purposes and are due at rates of around 25% fixed annual interest.

Best for Cash flow businesses and the brave.

Several entities will be happy to provide credit or loans – be it in the form of bank loans, lines of credit, credit cards, loans between individuals, or some other alternative.

The conditions of these loans are varied and I will not go into details. However, debt financing can be a risky but potentially justifiable option, especially for companies that have confirmed orders with future income that will allow them to meet the debt.

  1. Asset financing

An asset-based loan works in the same way as a mortgage. It consists of borrowing money with the guarantee of some personal or company assets, but you must bear in mind that, if you do not meet your obligations, the asset will be seized. In simple terms, asset-based financing is one that a lender offers as collateral for some of its assets including accounts receivable, short-term investments, inventory assets, equipment, and buildings, even as collateral in exchange for a loan fast money.

Despite the interest rates, asset financing can be extremely useful for a business in dire need of cash, or a business backed by valuable property that has yet to make big profits.

Best for: Those in need of a quick cash loan or quick injection of working capital.

It is an alternative to consider if you are in urgent need of working capital and have assets as collateral, especially if you are still waiting for significant future income from your clients.

  1. Factoring

Factoring can speed up cash flow and free up time chasing bad, but there are some downsides. A factor will impose a percentage on each invoice, so your profit margins will be reduced on each invoice, it can also be difficult to break a contract with a factoring company because you have to compensate them for all pending invoices before can formally exit factoring.

An alternative, which could be more profitable, is an online marketplace that allows you to auction your invoice to a community of investors. Receive payment immediately and the investor will receive a profit when he finally enters the money to cancel the invoice.

  1. Angel Investors

Angel investors are a good option at an early stage, as they can provide the investment in exchange for a stake in the company. Most angels are seasoned entrepreneurs and want to be involved in the strategic decisions of the company to protect their investment.

On the other hand, the process of finding and attracting an angel is much less difficult than it sounds. Some associations group them and you can locate them on the internet, a good reference is the LAVCA association were the most active angel funds in our region can be located. If you can put together a realistic growth projection and are willing to give up a piece of your business, this could be a very good option.

Typical financing amount : $ 10,000 to $ 500,000

Best for: Those with traction in your market or an attractive idea to investors.

Angels are high-value individuals looking to invest in the business. They can vary greatly in the amount they are willing to invest, the sectors that they are open to investing in, and the level of involvement they are trying to get from the business. Angels have personal motivations, mainly seeking to obtain important benefits in the future, they get involved in a great project and transmit their own experience to ensure the expected success.

Angel investors can come to invest in businesses through a variety of methods:

Direct investment

Many angels will be happy to invest directly in your business, without any middle man. This is a simple process in which you will be responsible for providing all the information about your venture to investors and negotiating the terms of their investment.

A great place to start would be finding local investors, attending events, and making personal contacts via networking. Linkedin is also a great way to get in touch with angel investors. Investors can also be contacted through referrals or specialized consultants.

It may also be that a group of investors come together to invest in your business. It is important to be careful with contracts so you should seek legal and financial advice, it is preferable to distrust those investors who promote their own representatives.

Trade unions and investor networks

Another alternative is investor networks where they group to invest through a syndicate, sharing the risks and benefits of their investments. They normally hold regular meetings where you can apply. Many angel networks come together to invest in a specific sector or a similar level of capital, these unions usually have their own procedures for signing the investment and creating investment contracts.

There are many hybrids of these systems, which can act as a financing platform and organize events for companies that meet potential investors.

  1. Crowdfunding

Crowdfunding began as the purpose of obtaining funds for social support, but then it evolved to obtain funds for ventures. In USA and some countries, local regulation is pending for its application, but that does not limit the possibility of applying to this system abroad to obtain funds. People come together, on crowdfunding sites, to invest their money in a particular company or idea, it could be a group of 10 people putting up $ 500 each or 3,000 people with $ 10 each.

Investors in crowdfunding sites are typically individuals who provide small amounts but serve to achieve the popularity of their idea through the crowdfunding site and get their idea to spread through word of mouth marketing.

If you are interested in obtaining financing through crowdfunding, do not hesitate to contact me to advise you on the matter.

Reward-based crowdfunding

Best for Product-based businesses that are willing to offer products. This is a great method of earning, not only investment but also developing brand ambassadors.

Kickstarter is perhaps the most famous platform to offer this service, in which investors commit funds in exchange for receiving a product on a defined future date, or in exchange for a reward, such as a discount on future purchases.

You can be incredibly innovative with your offerings, and if done right, such a campaign can build a truly disruptive business. The levels of funds available can be very high, depending on your product.

Stock crowdfunding

This type of crowdfunding is carried out on websites where people can view business launches, and invest an amount online of their choice up to the completion of the required capital investment limit. According to the platform used, you must decide the level of funds required and the equivalent capital that you are willing to give up to ensure it. Different sites have different demands, but they will all have approval processes that you will have to go through before being accepted on these sites; only a small percentage is accepted due to the large number of companies that apply.

These sites only allow launches that have a high chance of completing an investment round, as they generally only receive a commission when the required funding is achieved (some may have an additional charge).

Platforms like Crowdcube ask investors for a minimum investment of US $ 10. This approach still requires a large input from companies and must be addressed strategically, with a social media marketing campaign to channel potential investors.

  1. Startups Competencies

Best for All businesses, especially those seeking investor and media contacts.

I have included the competitions, as it is a viable option for many who are in a pre-investment stage, which can be a great way to deliver your proven and innovative idea. An example is the Startup USA program of the Ministry of Production, which is now in its sixth generation.

In more realistic terms, entering these contests are a great way to spread the word about your business, connect with other founders, and even attract a pool of potential investors.

You have to dose the time in participating in these contests because they require a lot of preparation time, but they have their rewards since the coverage for shortlisted in digital media can be extensive and will benefit all companies.

  1. Government-subsidized programs

Best for early-stage companies in specific sectors.

The government has funds available to support entrepreneurship, such as the Innovate USA program of the Ministry of Production.

Many entrepreneurs assume that you can only get government grants, but there are also many initiatives linked to universities, especially if you are a student or recent graduate. These grants are often designed for start-up companies or research purposes; although they can vary greatly.

Many concessions come with conditions, however, being very methodical and meeting the requirements requested by the incentive program, you can get interesting capital for the growth of your company. So it is necessary to evaluate the rewards that are offered against the attention and the time required to apply.

  1. Incubators and accelerators

Typical financing amount : $ 15,000 to $ 50,000

Best for: Those seeking both funding and support.

Incubators and accelerators offer an attractive means of obtaining funding and support. Several programs can be applied, either directly through their websites or by making contact with the people involved.

Some programs specialize in certain sectors, which would be a great help to any founder with personalized advice to their industry.

Most accelerators and incubators operate for a 16-week period, in which they usually work in the accelerator space under the supervision of their mentors. Many programs require travel and offer a fast track to your business growth and prepare your business to be more attractive to investors.

Although this is a great opportunity for those young companies or startups that consider they need additional guidance or are still trying to finalize the product-market adjustment. Accelerators and incubators strengthen the development of their business, as well as define the investment terms. The cost of these programs typically requires you to give up between 6% and 8% of your business in exchange for about $ 15,000 to $ 25,000.

  1. Venture capital investment

Typical financing amount: $ 200,000 or more

Best for High-traction companies with excellent product-market fit or highly ambitious projects.

Venture capital (VC) financing is generally the exclusive domain of companies with particularly ambitious and innovative projects with high growth potential. VC companies manage the investment of a wide range of investors, often representing a variety of mutual funds.

With this type of investment, a much more regulated and strict examination of the future decisions of the company is reached. VCs often take a more practical role in running the business, taking control of the business, and taking major decision-makers.

For most companies with a proven business model, and growth potential on an even larger scale, the venture capital investment will come in the second round of investment after an initial round of seed capital.

  1. ICO – Initial Coin Offering

Typical financing amount: $ 200,000 and above

Best for High-traction companies with excellent product-market fit or highly ambitious and innovative technical projects.

With the growth of cryptocurrencies, in the United States, a venture can be financed through the issuance of a cryptocurrency based on Ethereum. First, you must prepare a document that explains the business idea known as “White Paper”, which must be supported by industry influencers. Cryptocurrency is offered for sale as support for the money contributed to the company. The investor buys the cryptocurrency at a discounted value with the expectation of earning in the future, while the startup receives money as capital to grow its business.

Choosing your route to finance

Deciding which of these methods to follow to finance your startup is difficult, and making the wrong decision can be very costly. The best way to decide is by applying any of the financing options you consider, which may apply to your company, counting on the advice of a specialized company and consulting as many people as possible, and being open to talking about your business in detail.

This is a very important process for your business, so you should be adequately advised on the various financing options available.

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