For entrepreneurs, the already testing and nerve wrecking times are made even more stressful when they look around for ways to finance their startups. The sources available are many but their meanings can be confusing for people just starting down this line. And it is important to know the different types and their pros and cons before opting for a particular source of finance.
- Bootstrapping: It goes without saying that the best source for financing is your own savings. The advantages attached with it are numerous.
- No time wasted in looking and convincing investors
- Retain complete control of your business
- You are not liable to pay back/ answer to anyone if you encounter failure
- Family & Friends: This type of funding is known as personal investment where you depend on your relationships and networking, not on the actual business plan. This funding source is mostly tapped at the initial stages of startup to put the business on its feet and is known as seed funding.
- Quickly attainable
- More flexible payback periods
- Can strain relationships
- Angel Investors: These are private wealthy individuals who like to invest their savings in something they are passionate about or related to their field. The amount invested is usually small and in the seed capital stage.
- Most of the angel investors want some form of ownership of the company
- Some are happy to get percentage return for their investment
- More informal source of funding, may need more than one angel investor
- Crowd Funding: The increasingly popular form of funding these days, crowd funding is just as the names suggest, getting a group of people to fund/ donate money to your business. This is done through websites like Kickstarter, Rocket Hub etc using help of social media sites to spread the word about your venture.
- Can be time consuming and slow to gain traction
- Tap a large pool of people without any commitment to pay them back
- Venture Capitals: There are organization called venture capitalists who provide financing in return for equity and control of your business. Usually a syndicate of VCs are used and you get a large amount of money.
- Not appropriate for early stage seed investment
- Have to relinquish control
- Can be extremely time consuming
- Incubators: Mostly universities or organizations pool up their resources to invest in young companies in the initial stages, in return for some equity.
- Bank Loans & Credit Lines: One of the most common type of financing, banks have been a source since forever. You have to pay an interest on the amount of loan and pay back the loan amount in the stipulated period, regardless of success of business.
- Will likely need to put up some personal collateral
- Cumbersome documentation which is time consuming
- Can be quick if prepared
- Partnership With an Established Company: There are times when well-known companies can partner up with smaller startups if the believe that the product will benefit them as well. This is commonly done on technology side, where companies like Google also have funds set up to invest in startups with innovative technology ideas.