The most obvious conundrum when you are launching a startup is that the cash injection you need is hard to come by because you don’t have any trading history to justify being granted a loan by your bank.
There are several options available to you when traditional bank lending is not an option, so here is a look at some of the ways you might be able to pump the money you need into your new business venture and get everything underway.
Debt and equity
It is a good idea to start with the basics and appreciate that there are a couple of fundamental ways of externally funding your business, which is debt and equity.
The debt option is where you take out a loan and agree on a repayment plan over a period of time and at an agreed rate of interest. The other option is to give up a percentage of the business to an investor in return for their cash investment.
The obvious advantage to securing a finance deal over an equity stake is that you get to retain full ownership of your business, although there are obvious consequences to not paying the loan and neither option is without its negatives.
If you are trying to raise capital funding for stock and equipment and you are visiting a site like www.TruckDealersAustralia.com.au/truck-dealers/, for example, to secure a suitable vehicle for your business, it is possible that you can secure a finance deal for this rather than trying to raise a capital lump sum to inject into the business.
A fair percentage of business owners end up funding their business themselves through their own resources and personal borrowing options, especially when the business venture is new or doesn’t have a history to support commercial lending options.
There are several ways of doing this, through the use of personal loans, secured lending against their property, credit card borrowing, or selling some assets to raise the cash needed.
Taking on personal debt such as credit card borrowing can prove to be a very expensive option and it is not often considered a prudent option unless you are confident that it is short-term funding and the business will be able to support repaying you the money within a reasonable timeframe.
Can you afford to lose it?
You should always consider the risks attached to using personal assets and resources to fund your business plans and evaluate whether you can truly afford to lose the money if things don’t work out as planned.
You will no doubt be excited and optimistic about the potential for your startup but it never does any harm to look at the pros and cons and look at the negative consequences of losing your cash and how that would affect your personal financial circumstances.
It also pays to not only think about whether you can afford to lose any personal money you inject into the business but also to do your calculations to work exactly how much the business really needs for startup and working capital.
Underfunding the business can create cash flow problems and if you have estimated exactly how much you need it could create a scenario where you run out of cash before your plans get a chance to come to fruition.
Keep a clean paper trail
If you put personal funds into the business and have decided whether you are treating these funds as equity or a loan, it is then important to create a paper trail that documents the loan correctly.
Get a professional opinion on this subject if you are unsure how to account for cash injection in the right way and create a distinction between any personal and business assets.
Explore all your options
The days of just going to your local bank for a business loan are long gone and you now have a much wider range of funding options, which are all worth exploring before you finally settle on how best to raise the capital you need.
Crowdfunding platforms and venture capital are two potential options. Crowdfunding will potentially give you more options than venture capital, which tends to focus on large investment opportunities rather than small business loans.
Raising the cash you need for your business is not always straightforward but at least you have a number of avenues to explore in your search for the cash your plans require.
This post was written by Charlie Hunt. Chalie shares his business knowledge around the internet. He’s a business consultant who takes great pride in seeing his client’s businesses flourish.