How to get money for startup development?
The founder of a company not only needs to study the market well, come up with an excellent business idea and understand how to generate income but also find money to launch a project. There are various options for raising funds, each of which is associated with certain consequences. Let’s get to know more about how to get money for a startup.
Income and expense forecast
To answer these questions, you need to make a cash flow forecast. It is best to prepare several scenarios: optimistic – attracting large investments/fast business growth, realistic – gradual development, and also the most pessimistic – in case the company does not manage to get the expected income.
The forecast should be quite detailed: you need to calculate the estimated income per month, subtract expenses from it (for salaries, rent, research and development, marketing, etc.) and pledge a certain amount in case of unforeseen circumstances. It should be remembered that plans can seriously differ from reality. The timing of purchases or contracts, as well as the dates of tax payments, are of great importance.
This option allows you to do without the help of banks and funds. You can use personal savings only in the first stage to make sure that the business idea is working, or invest until the company starts generating enough income to reinvest.
However, not everyone has enough free funds or relatives who are able to borrow the required amount. In addition, the business idea itself requires large up-front investments (for example, speaking about product development and creation and/or marketing).
In this case, the founders of the business have two options: to borrow or sell a stake in the company.
It is a nice option for companies generating income. Fulfilling the requirements of the state, banks create business support programs. Such proposals usually imply the personal responsibility of the founders of the business (at least in the first years of its existence) – this is how credit organizations protect themselves from possible risks.
P2P lending platforms
Platforms like Funding Circle assess the risks, liquidity, and asset value of companies and enable individuals to invest at higher interest rates than they could get from a bank.
If you believe in your business, need investments before earning income, and want to save money, you can use your own funds or find a business partner who can contribute part of the required amount and become your co-founder.
This approach can help in the future if you decide to raise funding through a share issue – the willingness of the founders to risk their own money increases investor confidence.
As a rule, business angels make investments in exchange for a share in the company, but sometimes they can issue loans. In addition, such investors can share their experience and useful contacts with you.
You can search for business angels on your own (for example, on LinkedIn) or use special platforms for this. They charge 5% to 8% of the amount as a commission, but this investment makes sense because it saves the founders time and energy.
Over the past years, companies such as Seedrs and Crowdcube have become popular investment attraction options. A business looking for money can easily attract hundreds of shareholders, which may be beneficial to the company initially but risks becoming difficult later on.
Besides, crowd investing is not as democratic as one would like to believe. For a fundraising campaign to be unsuccessful, 30 to 40% of the amount must be collected prior to starting the process.
The government offers generous tax incentives for investing in startups, but not all investors are willing to spend their personal time selecting interesting projects. Instead, this task is often performed by funds that make up a diversified portfolio of investments. This is a very effective way to raise money for startups, as one conversation can be enough to raise the amount needed to implement a project. In addition, this sector usually employs seasoned investors who are willing to provide further funding for business growth.
As you can see, there are many options to get money for your project. Nevertheless, you should understand that money does not guarantee that your project will be successful. To become successful, you should invest not only money but also your time and effort.