Business idea: Six sources of funding for your startup

Investing your economic resources in a startup is the most immediate demonstration of believing in the success of an entrepreneurial idea.

You will probably be able to convince family and friends to shell out their savings, but will you be able to convince investors or external entities?

Whether you want to start your own startup or want to develop a business plan sooner or later you will know well that you need to find the funds to finance your business idea, and very often the equity is not enough.

You can have the brightest idea in the world, the most enterprising and humanitarian that exists, but if you don’t find the funds to finance it , it will be difficult to get even the slightest result.

Do not you agree?

On the other hand, knowing the main alternatives is important for making the best decision based on your needs and requirements. This decision will influence the startup’s success or failure: you shouldn’t take it lightly.

As a result, in this article I want to offer you six ways to finance your business, the latest recently developed.

Let’s see.

1) Traditional bank financing

After using his family savings, if the available capital does not meet the company’s initial financial needs, the entrepreneur can go to a bank to obtain the necessary liquidity.

This is the traditional way: it is possible to obtain a credit to start the business, upon presentation of a solid project and adequate guarantees (assets, properties, and savings). If you don’t have these guarantees, it is difficult to obtain financing from a lender, better to look further.

Also because the loan disbursed is subject to interest expense, to which must be added the regularity with which the loan must be repaid.

It should not be forgotten that in the initial startup phase there are hardly predictable revenues, which is a problem for the financial management of the company.

2) Microcredit, grants and subsidized finance

If the bank loan is not the right solution for your needs, you could consider:

Microcredit: These are small loans up to a maximum of € 25/35 thousand payable by private entities that are within the social economy or state bodies at national or local level that use it as a form of welfare, aid social.

I am in favor of non-bankable subjects, that is, who cannot access credit in the traditional way. To have access to microcredit, a credible project and a business plan are often enough to create jobs, structure a company or develop an existing one.

Facilitated finance : they are all those interventions ordered by the national, regional or community legislator, which have as their objective that of making financial instruments available to companies at more advantageous conditions than market conditions.

You can have lower interest and reduced risk of insolvency, in case of bankruptcy, by accessing bank loans through guarantee funds created by the Ministry for Economic Development.

Obviously there is the obligation to return a small part of the overdraft and the rest is covered by the fund.

Trying one of these ways, if you decide to operate in Indian, can be a good idea that does not involve big risks and dangers. Rate it well.

3) The popular Crowd funding

In recent years, Crowdfunding has provided entrepreneurs with an alternative to traditional loans.

Given the fundraising process for an online project or product, crowdfunding allows friends, family and strangers to contribute smaller amounts to help you meet your needs. The channel where money flows is the internet.

In return, donors can obtain different forms of remuneration depending on the type of crowdfunding. Among them, the most common and popular are:

Crowdfunding Donation-based : platform that is allowed to make donations to help entrepreneurs achieve a specific goal. The donor does not receive anything in return.

Crowdfunding Reward-based : platform in which investors will get a small compensation, not for monetary strength, compared to what they have invested.

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Equity crowdfunding:  platform where investors can get a percentage of future results, or become shareholders of the future company.

Debt crowdfunding : also known as peer to peer lending , it is based on the collection of funds necessary for a business on the loan that is not asked of a bank, but of people. Then when the established amount is reached and the project started, the loan must be paid off, making the money lent back.

The crowdfunding Reward-based may be suitable if you have no income and you’re just trying to launch your product for the first time . Many entrepreneurs use this type of crowdfunding to start new products and gain visibility.

If you are interested in a non-profit project then the most suitable solution may be Donation-based crowdfunding , in which the benefactors will be more likely to donate part of their money for social, cultural, environmental, welfare and common purpose purposes.

L ‘ equity crowdfunding can be suitable for any business that wants to give up part of the company to receive the capital they need to grow rapidly, while the Debt crowdfunding is less risky than the latter and provides more predictable returns and relatively lower .

4) IPO, the initial public offering

L ‘ IPO (initial public offering) , or initial public offering is when a company increases the investment capital by offering its shares to the public for the first time.

In an initial public offering, the issuer, or company that raises capital, introduces a subscription company or investment bank, to help determine the best type of security to issue, by offering price, quantity of shares and timing for the market offer.

The steps, outlined by Investopedia, include the following steps:

  1. The company hires an investment bank , whose job is to start the subscription. The latter allows you to raise capital from investors on behalf of the company.
  1. The company negotiates the agreement with the investment bank . In this phase the problems to be negotiated are defined, which include how much money a company wants, what types of securities will be issued and how the agreement will be structured. The structuring can be a firm commitment, in which a subscriber guarantees how much it will be increased, or an agreement of better conditions, under which the subscriber sells securities, but does not guarantee to the company how much will be collected.
  2. The investment bank prepares a registration agreement , which usually includes financial statements, management background, any legal issues that are being and are addressed by the company and other corporate information. The deal is filed with the Securities Exchange Commission (SEC), which verifies that the information is correct, then sets a date on which the shares can be offered to the public.
  3. The subscriber issues an initial prospectus. This prospectus contains most of the information about the company but not the offer price or the effective date. It is during this phase that the underwriter tries to attract large institutional investors.
  4. The company and the underwriter negotiate the price , which depends on the valuation of the SEC and what conditions occurred in the market when the effective date approaches.
  5. The investment bank sells the securities on the stock market . This is when investors raise money.

The growing businesses seeking to expand the capital are those that generally use initial public offerings, but also the largest private company or companies that want to go public can do.

This form of financing is more suitable for companies that have already started and with a few years of activity. In fact, few startups reach this stage to increase their capital: a 2016 study shows that a company takes an average of 8 years to reach the IPO , and unfortunately many fail first.

5) Venture Capital and Business Angel

In recent years, a category of entrepreneurs has developed who, by now experts in some economic and productive sectors, are dedicated to “talent scouting”, and are looking for innovative and promising business ideas.

However, there are differences between the two: the business angel is usually a single investor who offers his own money, while venture capital represents the company that finances startups with money from other third parties.

Venture capitalists aim to identify and finance entrepreneurs who have ideas with huge profit potential . They raise money, offering investors the opportunity to take part in a fund, which is then used to buy shares in a private company.

Their activity focuses on providing funding for startups or dedicating themselves to financing particular technological areas.

The investment of a Venture Capital is characterized by a high level of operational and financial risk , since initially it is not possible to know precisely whether the startup loans provided will generate profits.

Certainly for a novice entrepreneur the entry on the scene of a Business Angel can represent a great opportunity to develop, refine the idea and try to grow.

It should not be forgotten, however, that the investor, in exchange for the loan, will acquire a portion of the company’s shares. You must therefore be available to sell a slice of your startup and accept the imposition of some strategic decisions, such as the insertion of managerial figures at the top of the company.

6) ICO (Initial Coin Offering)

According to Forbes , less than 1% of startups seeking traditional funding receive money from business angels and only 0.05% receive venture capital funding.

Therefore those who have an entrepreneurial idea should also evaluate the ICO (Initial Coin Offering ), a new way of financing startups. They are based on the formation of a particular crypto currency, called Token. The token is considered the term of exchange (the business idea) with investors.

These coins can be purchased in a limited period of time (a few weeks), at a price set by the creators, in exchange for other crypto currencies Thereafter, pre-created tokens can be easily sold and exchanged with all existing crypto currencies.

Before the sale, the “white paper” is published, a document where all the activities concerning the creation of the new company are presented.

The advantages of this new funding source are manifold.

First of all, the ICO takes place at the beginning of the startup’s life and therefore is able to bring financial value immediately. Being unregulated, it does not require the time and financial and bureaucratic costs typically associated with an IPO and do not require taxation.

In addition, token sales are direct and investors base their decisions on the content of the projects prepared by the company itself. Finally, there is greater control over the capital raised and there are not all the constraints of crowd funding , such as the tariffs of the portals and the release times of the funds.

Like all things, there are negative sides: ICOs refer to projects that have not yet been carried out and with no guarantee of success. They are very risky and require specific knowledge in the Block chain sector to be approached: if the results of the company in which you have invested are positive, you gain, otherwise you lose all the capital.

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