Start up finance is a monetary investment in the growth and structure of a new company or business. One cannot overlook the fact that finance is one of the major factors for businesses especially startups. To start a business or company, you need a vision, an outline or idea. Once this idea is formulated, the process of designing a logo and getting a name for your business begins.
Having done the above-mentioned procedures, the next step is choosing a business structure; this is one of the most important choices you would make as a startup business owner. Due to how important a business structure is to your business, it’s important you choose one suitable for your type of business. There are many types of business structures and each has its own pros and cons, it is therefore not out of place to be careful in picking the right fit for you. Below are the different types;
- Sole Proprietorship; this is the simplest form of business structure and it involves one person being responsible for both the profits and losses of the business. With this type of business structure, there is no legal distinction between the owner and the business.
- Partnership; as the name implies, the business is owned by two or more partners. This type is divided into two groups. The first is the general partnership; where control, profits and losses are shared equally between or amongst partners and the second is the limited partnership, which involves one partner being in control of the business’s operation while the other(s) contribute and get a partial percentage of the company’s profit.
- Corporation; this a business structure where the business legally exists separately from the owners. It has its own legal rights and is totally independent of its owner.
- Limited Liability Company (LLC); this is a hybrid type of business structure, that combines the characteristics of the other types mentioned above. In this structure, the business owners are not personally liable to the company’s debts.
- Cooperative; this is a type of business structure controlled by its members to meet their common socio-economic and cultural needs.
In the United Kingdom (UK), the standard registration fee to set up a company is between £12 to £100 depending on the method you choose. While in the United States of America (USA), incorporating a company costs between $25 and a few thousand dollars. This charge would cover registration fees which mostly depends on your location and also legal fees.
Funding for a startup business is very important but do know that intense funding for your business does not guarantee the success of the business. That is to say, that a startup business that has little funding can still grow to be a global one, this is because there are other factors alongside funding that make a startup business successful. These factors are Timing, Team/Execution, Idea, and Business Model.
To get funds for your business, there are various options to pick from the common ones are either you take a loan from financial institutions or you pitch your idea to an Angel investor and hope he gives you funds for your business. Now, if you’re approaching investors, there are two types; the angel investors and venture capitalist.
- Angel Investors
These are rich and influential business owners who provide funding (capital) for startup businesses. These investors do not only give financial support but because they are usually experienced and successful in the act of business expansion and development, they also provide business know-how.
They act as advisors and give tips on how to improve your business model. In exchange for all these, angel investors either take a percentage of ownership in your company or about 20 to 25 percent return on the money invested in your business.
- Venture Capitalist
Venture capitalists also invest financially in startup businesses that have the potential for high growth. However, unlike angel investors, who invest with their money, venture capitalists are companies that take money from big investors and invest in smaller companies. In exchange for this financial support, they get equity or an ownership stake in the startup business.
Why Do You Need Startup Finance
Most startup businesses depend on external sources for funds. According to a British Business Bank Survey in 2016, 60% of businesses with 0-249 staff strength sought some form of external funding. There are various reasons why businesses need finance, and they vary from one business to another. However, there are common reasons why startup businesses need finance.
- Working Capital
This is the capital of a business which is used for the day to day activities. Therefore, for a business to run smoothly there is a need to have sufficient working capital. This is why most startup businesses rely on external funding for this.
The Business Funding Survey in British Business Bank in the year 2015, shows that the most common reason why small businesses apply for external funding is because of working capital.
- Business Expansion
Most startups need finance to grow their businesses. To grow your business, you need financial resources to purchase some equipment or machinery that would not only make performance easier and more efficient but also helps you keep up with competitors.
- To Develop and Create New Products
There’s no specific time to create new products, it could be immediately you start your business or much later. Being a new business owner or owning a young and recent business does not limit you to more possibilities, hence, funding is necessary to develop and create new products. These new products put your business on the map and make you more known to potential customers.
- To Enter New Markets
This is a stretch from the above point, creating new products means you have to find new markets to sell them and there are financial obligations involved in doing so. Exploring new markets means you need funds to research on suitable geographical locations as well as funds for the marketing and advertising of your products in this new place. This might be too many expenses for a startup company, therefore, getting funds from external sources is almost inevitable.
The question of how do I fund my startup business is a common one among business owners. Luckily, there are various options in doing so.
This option is also known as self-funding. Those who follow this option either do not want the financial debt that comes with taking loans or do not have enough potential to apply for loans. So, they use their personal savings to fund their business or get funds from family and friends. This is quite easy as there are fewer formalities involved and loved ones are flexible with interest rate.
This has been pointed out above; you can either approach angel investors or Venture Capitalists. Consider the pros and cons of each of them and go for the most suitable option for your startup business.
This is one of the recent ways of getting funds for startup businesses and it has gained grounds since its introduction. For crowdfunding, a business owner would put up details of his business on a crowdfunding platform. The business details have to cover the goals, plans and purpose, profit, amount of loan needed and reason for this loan.
This way, consumers on this platform can get to know about the business and if they are persuaded enough, give funds. Those interested would make pledges online, which entails them pre-buying the product or making a donation.
In summary, the issue of funding for startup businesses is one that leaves entrepreneurs frustrated and disappointed. However, different funding options are available to choose from. As a new business owner, carefully go through these options and pick one suitable for you and your business.