Funding your Startup
One of the biggest challenges facing many aspiring business owners is financing their startup.
Some businesses, for example personal service businesses, require very little capital to launch.
Other businesses, for example manufacturing businesses, can require large sums of money.
The inability to finance a startup is one of the main reasons many people never progress from idea to business launch.
To help you understand some of the options available, we are going to briefly explore some of the traditional methods of funding a new business and will also look at some less common strategies.
The main funding approaches available are one of, or a combination of, the following:
Self-Funding
Many small business owners fund their startup out of their own savings.
Others incrementally fund their startup out of their wages from another job over time which they work in parallel to the startup.
Where possible this incremental funding strategy is often the preferred choice for simple startups as it naturally limits financial risk, does not involve handing any control of the business over to other investors and doesn’t expose the business owners to debt.
The downside is that it can slow the pace of launch and growth, and isn’t appropriate for startups that require larger capital outlays or commitments, such as buying equipment or leasing buildings.
Loans
There are a large range of debt financing (another way of saying loans) available to finance a new business.
These include secured and unsecured loans, lines of credit, and equipment financing.
To secure a loan, businesses must typically present a solid business plan, financial statements, and collateral (for secured loans).
While bank loans offer stability and established terms, the application process can be time-consuming, and stringent eligibility criteria may limit access for some businesses.
In many cases, lenders also won’t lend to startups directly so the business owners will have to borrow in their own names and often will be asked to access existing equity, for example equity from their home.
Government Grants and Programs
The Australian government provides various grants to startups and new small businesses across different industries and locations.
These grants often fund specific aims like research and development, innovation, export opportunities, and job creation.
However, grants will almost never fund the basic items and activities necessary to start the business itself.
It can also be difficult to keep track of what grants are actually open for new applications and more often than not it is difficult to get solid guidance from the departments issuing the grants.
The decision-making process and rationale around the selection of recipients is also often murky.
Finally, securing government grants can be competitive, and the application process is often long and involved.
It tends to be better to view grants as good additional funding that can provide further capability to the business if you have the time and capacity to get involved in the application process, rather than a source of funding that you really need.
Venture Capital
For high-growth potential businesses, Venture Capital (VC) can be an option.
VC companies and funds invest in startups and small businesses in exchange for a share of the ownership of the business, often just called equity.
Besides funding, VCs often provide valuable expertise, mentorship, and access to their network of contacts.
However, if you go down the VC route you need to be aware that you are giving up a portion of ownership of the business.
This means giving up some of the decision-making control to investors, along with a share of the future profits.
While often a good option, attracting VC funding is difficult and requires a convincing business model and a strong growth trajectory.
This strategy is also more difficult to employ in Australia compared to some other countries, particularly the USA.
Angel Investors
Angel Investors are very similar to venture capitalists; however, they tend to be individuals instead of collectives or corporate entities.
These people invest their personal funds and will often look for earlier-stage businesses so Angel Investors may invest at a smaller scale than VCs will consider.
Angel Investors are often more accessible to small businesses than venture capitalists and they are typically interested in supporting local entrepreneurs.
A big benefit for new business owners is that Angel Investors may offer mentorship and industry expertise in addition to financial backing.
However, entering into an agreement with an Angel Investor, just like a VC, means giving up some of the decision-making control to the Angel Investor, along with a share of the future profits.
These are just some of the funding options available to startups and small businesses in Australia.
Each of these has its own advantages and disadvantages so you should thoroughly evaluate your business needs, growth prospects, and your personal risk tolerance before selecting a funding option.
It’s also a good idea to seek professional advice from a variety of sources and perspectives before committing to a funding strategy, or combination of strategies.
If you have a question about starting a business or running your existing business, we’d love to hear from you because we’ll select a new question to answer here every two weeks. You can submit your question to james@qsb-consulting.com using the subject ‘CQToday’.
