Launching a start-up is hard work.
And it takes money. For many founders, choosing the right business financing solutions is the difference between a triumphant launch… and heartbreak before they ever get started.
The problem is…
Most start-ups fail. And it’s not because their ideas stink. It’s because they run out of cash before they can prove their concepts have legs.
The good news? It doesn’t have to be that way.
In this post, you will discover
- Why Business Financing Solutions are Important
- Types of Financing Solutions for Start-Ups
- Picking the Right Financing Solution for Your Situation
- 5 Steps to Making Your Start-Up Investment Ready
Why Business Financing Solutions are Important
Cash flow is the #1 killer of start-ups.
This isn’t hyperbole. Research from Embroker found that a full 82% of failed businesses were dissolved due to cash flow issues. Pause and think about that for a second…
82%. That means more than 4 out of 5 companies could trace their demise back to a financial problem.
That’s why finding the right business financing solutions is so critical for start-ups. Cash isn’t just nice to have. It’s absolutely essential. With the right startup funding, founders gain the runway they need to develop their product, validate their market, and start generating revenue.
On the other hand…
The most brilliant product in the world is useless if the company can’t find a way to pay for it until it becomes self-sustaining.
And that’s a massive challenge because…
It’s rare that start-ups begin with much in the way of financial resources. In fact, data from Embroker tells us that 78% of startups are self-funded. Founders use their own savings to start their businesses.
The problem with that approach is that startups are risky investments. For many companies, success doesn’t come for years.
The average new business takes 4 years to become profitable. That’s 4 years of runway needed to reach the point where money is no longer a problem.
Common Financing Options for Start-Ups
All start-up financing solutions aren’t created equal. Each funding type has its pros and cons. Founders must understand them to make smart choices about which options to pursue.
Let’s take a look at some of the most popular funding options for start-ups.
Bootstrapping
Bootstrapping is when founders fund their own operations using personal savings. Bootstrapping allows the founders to maintain complete control of their business. The downside is that resources are limited and risk is high.
Bootstrapping works best for start-ups that require little in the way of upfront investment and have founders that can generate revenue quickly.
Angel Investors
Angel investors are typically wealthy individuals that invest their personal funds into early-stage businesses. Angels are a popular choice because they not only provide capital but often have a wealth of experience and networks to share.
The trade-off with angel investment is that you have to give up some equity. Founders must determine if an angel’s value to the business is worth the cost of sharing ownership.
Venture Capital
Venture capital firms provide large sums of money to start-ups with the potential to scale and generate significant returns. VC firms have much larger funds than most angels but in exchange for equity stakes, typically minority ownership but still.
Venture capital is suitable for start-ups with high growth potential and scalable business models.
Something to keep in mind with VC firms is that they are notoriously picky. Most review thousands of start-up pitches each year but only fund a small percentage.
To pique the interest of VCs, businesses must have a strong team, clear market opportunity, and proof of some traction.
Business Loans
Business loans are a traditional option for small businesses in need of capital. Loans provide access to cash without giving up equity. Both banks and alternative lenders offer a range of loan products for businesses and start-ups.
The difficulty with business loans is that most lenders require some track record or collateral. New businesses with no revenue history often struggle to qualify.
Revenue-Based Financing
Revenue-based financing is a newer start-up financing solutions where repayment is tied to a percentage of monthly revenue. Payment amounts vary depending on the business’s performance each month. The higher the revenue in a given month, the higher the repayment.
Revenue-based financing is an attractive option for businesses with predictable revenues that want to avoid diluting ownership.
How to Pick the Right Funding Path
There is no “right” financing solution for all businesses. Different funding types are better or worse depending on the individual situation.
Founders should ask themselves a few questions before diving into financing:
- How much control are you willing to give up?
- How soon do you need the money?
- What stage is the business at?
- Can you demonstrate revenue or traction?
- What’s your risk tolerance?
Unproven concepts in the early stages often need to bootstrap or seek angel investment to get started. These options are more flexible while the business model is being refined.
Growth-stage businesses with some traction may be better suited to venture capital or larger loan facilities. At this point, the business has more data to show its potential to investors.
The key is to match the financing solution to the company’s current needs and future plans. Raising too much money too early is just as dangerous as raising too little.
5 Steps to Making Your Start-Up Investment-Ready
Founders can increase their odds of landing the right financing by being prepared. Investors and lenders all look for specific criteria when evaluating opportunities.
By optimizing for these key areas in advance, founders can make the fundraising process much smoother.
Create a Solid Business Plan
A good business plan demonstrates to investors that the founder understands the market, competition, and path to profitability. Business plans don’t need to be exhaustive, but they do need to answer the important questions.
Understand the Numbers
Investors will scrutinize your financial projections. Founders must know their unit economics, customer acquisition costs, and runway. You can gain credibility in the eyes of investors by speaking confidently about the numbers.
Demonstrate Traction
Showcasing tangible results is the best way to convince potential investors that your business has market demand. Whether it’s customer sign-ups, revenue growth, partnerships, or pilot programs, evidence of traction is powerful.
Assemble the Right Team
Team is one of the most important factors for investors. Strong teams with complementary skills and relevant experience are much more attractive to investors.
Perfect the Pitch
Presentation matters, whether it’s a deck for investors or a loan application. Clear, concise, and compelling communication will help founders get noticed.
Wrapping Things Up
Business financing solutions can help unlock the full potential of a start-up.
The truth is simple…
Start-ups need capital to reach profitability. Founders that understand the different types of funding, know how to choose the right fit for their situation, and prepare properly have a much better chance of success.
Let’s quickly summarize…
- Cash flow issues are the primary cause of start-up failure
- Various financing options are available for different needs
- Businesses should match their funding type to current requirements
- Preparation can help founders secure financing
- The right financing provides the runway start-ups need to succeed
Finding the right financing solutions can take time and effort. But for founders that are serious about building something of value, it’s time well spent.
Start-ups that thrive aren’t necessarily the ones with the best ideas. They’re the ones that can figure out how to fund their idea long enough to prove its worth.
