The aspiring entrepreneur who is about to launch one’s first start-up not only have to study the market deeply, come up with an unusual and fresh business idea and learn how to generate income with its help but also find finances to start a business. There are various ways of obtaining money, each of which is associated with certain consequences. How do you choose the one that suits your particular business?
Income and Cost Forecast
To answer this question, you have 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 costs (salaries, rent, research and development, marketing, etc.) from it, and allocate 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, and the dates of taxes are crucial.
Funding Sources Can Also Vary
Not everyone has enough free funds or relatives who can borrow the required amount. Besides, the business idea itself can be capital intensive and require large up-front investments (for instance, in product development and creation or marketing). Therefore, consider the following options:
Over the past eight years, companies such as Seedrs and Crowdcube have become popular investment attraction options in Nigeria. Investors on such sites invest from £100 to £50 thousand. A business looking for £100,000 can easily attract hundreds of shareholders, which may be beneficial to the company initially but risks becoming difficult later on. Besides, crowdinvesting is not as democratic as one would like to believe — for a fundraising campaign to be successful, 30 to 40% of the amount must be collected before the process begins.
Another option available to companies around the world is crowdfunding through Kickstarter or Indiegogo. The use of these services helps to increase brand awareness and find costs for the implementation of the project. Clients of the platform choose interesting projects and pay in advance, while production starts only when the required number of “patrons” is reached.
2. Friends, family, and fools
3F — friends, family, and fools — it is the classic formula for raised capital. This is often the easiest and fastest option, but it is not suitable for everyone: this approach can lead to spoilt relationships with loved ones if the business faces difficulties. Another possibility is special programs for start-ups. You may also consider forex trading with the help of forex tools and the Forextime blog.
3. Angel investments
As a rule, business angels make investments in exchange for a share in the company, but sometimes they can issue loans of £5-100 thousand. Besides, such investors can share their experience and useful contacts with you. You can search for business angels on your own (for instance, on LinkedIn) or use special platforms for this. They charge between 5% and 8% of the amount as an interest, but this investment makes sense as it saves the founders time and energy.
4. P2P lending platforms
Platforms like Funding Circle assess the risks, liquidity, and asset value of companies and allow individuals to invest at higher interest rates than they could get from a bank.
5. Investment funds
The government offers generous tax incentives for investing in start-ups, 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 start-ups, as one conversation can be enough to raise the amount needed to implement a project. Besides, the sector usually employs seasoned investors who are willing to provide further funding as the business grows.
6. Founder’s money
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 obtain funding through a share issue — the willingness of the founders to risk their own money increases investor confidence.