What you need to know about startup financing
Many prospective business owners do not realize the challenge they will face in getting the money they need to start their business. They may assume that because they have a such a great product or service that lenders and/or investors will be lining up to put money into their business. The reality is that most new business owners find that the most difficult part of starting a business is finding the money for it. The good news is that while this is a challenge there are steps that you can take that will improve your odds for getting startup financing that you need. Here is what you need to know about startup financing-
- Know how much you will need-The lender that you applying to will not be impressed with vague numbers of guesswork. You will need to take the time and put in the effort to plan, research, and come up with the amount of money that you will need to get your business started.There are many different factors that you should consider such as: cost of inventory, rent, marketing and advertising expenses, and legal and insurance costs. You should also be able to answer some very important questions that your lender will most likely ask you. These questions can include but are not limited to:
1. Will you need short or long term financing?
2. What type of payment plan will you need?
3. Can you show that you will have the means to repay the loan or provide a return on the investment?
4. What will the money be used for?
5. What type of risk will you be willing to take on? Do you have personal money that you will invest or collateral to offer up?
- Know what kind of financing to consider-There are basically two different types of business financing. These types of financing are known as debt and equity financing. Debt financing is used when you borrow an amount of money and set up an agreement to pay it back within a certain time frame. Most lenders will charge a set interest rate on the amount that you borrow. It is important to understand that you will be legally required to repay the amount whether or not your startup business is successful. Equity financing is when the business owner is a given a cash investment and in return the investor is a given a partial ownership in the business. The risk is assumed by the investor since the business owner does not have to pay back the initial investment if the startup business is not successful. It should be noted however, that you will be required to give up some control of your business in order to take investment money.
- Know where you can get the money-There are many different options when it comes to getting financing for your startup business. Most business owners automatically assume that they will need to get financing from a bank or venture capital firm but these are not the only places that you can get money to start your business. In fact, some business owners feel that these are the most difficult options to use when it comes to getting money for your startup business. This makes it worthwhile to consider other options for money. These other options can include but are not limited to: family and friends, credit cards, angel investors, or private lenders. There is a note of caution on some of these options. If you choose to approach family and friends about putting money into your business you will need to be very clear about whether you are asking for a loan or investment. Finally, credit cards can be a viable financing options but it should be noted that they will have a very high interest rate.