When setting up a new business, the entrepreneurial process may differ from one company to the other. But the most common approach involves four stages. The stages are idea creation, the filtering process where you evaluate your ideas, business model and business plan creation, and securing capital and initial financing.

When it comes to financing startups, most financial institutions prefer funding a business that has existed for more than two years. That’s why the financing stage is crucial for any startup. 

There are two financing options that you can choose from. That’s equity and debt financing. Equity refers to getting an investor to finance your startup while, in return, they own a percentage of the company. Debt refers to taking loans that you’ll repay to finance the venture. It’d be best if you chose a financing model that suits your business as an entrepreneur. 

This article explains the financing options available to help you choose the best financing model.

1. Try Business Loans

Some financial institutions are open to financing startups as long as you have a good credit history and score. You’ll be required to present a business plan that stipulates your financial numbers and projections, your growth strategy, your company mission statement, and your products and services. The types of small business loans offered differ from one lender to the other. 

Some of the lenders you can approach for business loans are banks, online lenders, non-profit microlenders, and the Small Business Administration. The Small Business Administration consists of a group of lenders that fund businesses through an agency. Their advantage is that they offer extended repayment periods.

2. Consider Series Funding

When a startup does fundraising rounds with a round raising more than the previous round while raising the business value, it’s called series funding. The series is alphabetical: A, B, C, D, and E.

• Series A. Once you’ve developed a business plan and clear expected projections for your revenues and key performance indicators, you’re ready to embark on series A. Without a proper strategy, businesses have a high chance of failure at this stage.
• A seed round will range from $10 million to $15 million. You can raise these funds from equity crowdfunding, venture capitalists, or angel investors.
• Series B. Once the business achieves the objectives set in Series A, it’s time to move to the next series. In series B, the main objective is expansion. The funders are most likely the same venture capitalists in series A who opt to reinvest their money and keep their stake in the business. New venture capitalists may also decide to invest in the startup even though they didn’t invest in the first series.
• Series C. At the series C stage, the company is most likely doing very well and preparing for an initial public offering (IPO), acquisition, or expansion. Most companies may not proceed to series D or E as they don’t need more funds. Series C valuation is about $100 million and $120 million.
• Series D. A company may proceed to series D for two reasons. If the investors identify an expansion opportunity, they may require much more capital than what the company holds. The other reason is if the company faces a down round or it failed to achieve its financial objectives.
• Series E. Companies rarely reach series E. But if they do, it’s because of the reasons mentioned in series D, or they need a significant boost before going for an IPO. Some companies reach this stage when trying to remain a private company or never meeting their financial expectations.

As a startup, you must carefully consider the terms of each round of funding, including the company’s valuation, the amount of equity offered to investors, and the involvement of the investors in the company’s operations. 

4. Look At Crowdfunding

Crowdfunding is raising money from different sources through online platforms, in exchange for rewards or equity.

When crowdfunding, you’ll need to develop a business plan, prototypes, and market research, then pitch the ideas to your friends, family, individual investors, and institutions. You can always crowdsource online through fora like Kickstarter or GoFundMe.

3. Seek Out Venture Capitalists

Venture capitalists are financiers in limited partnerships that fund a startup for a stake in the company. A commission appointed by the venture capitalists oversees the deal and makes financial decisions on behalf of the partners.

The partners set a duration between 7 to 10 years to generate a significant profit for their investment. That’s why venture capitalist funding is ideal for startups that require considerable money as the returns will also be substantial.

5. Go For Angel Investments

Angel investment is a form of financing in which wealthy individuals provide capital in exchange for equity. Angel investors are high-net-worth persons looking for high-return investment opportunities. They may also offer mentorship, guidance and industry connections to the startup in addition to funding.

Angel investment has advantages over other financing models that a startup may want to consider. As investors typically invest their own money, in most cases, they’re more flexible and less bureaucratic than institutional investors. As mentioned earlier, they can provide valuable advice and mentorship to the startup. This is because angel investors often have relevant industry experience. Further, these investors can also help the startup with introductions to other potential investors and customers.

Just as this financing model has advantages, it also has its pitfalls.  Investors may have high expectations regarding investment return, which can put a lot of pressure on the startup. Plus, you may find that some angel investors may wish to be involved in the startup’s day-to-day operations. 

Conclusion

The funding options above aren’t the only ones out there. So, before settling on a funding model, ensure it complements the company’s objectives so that your cashflow isn’t negatively affected. Factor in the model’s primary aim and the model’s working capital, and choose what works best for the company.

• SEO Powered Content & PR Distribution. Get Amplified Today.
• Platoblockchain. Web3 Metaverse Intelligence. Knowledge Amplified. Access Here.
• Source: Plato Data Intelligence: PlatoData.io