Selecting The Right Source of Funds for your startup
In order to take our startup to the next level, We need to get a hold of its finance. We understand how hard it can be to select the right channels for raising funds- So we’ve tried to break it down for you.
Firstly, there are a few things which we need to keep in mind, what are the different reasons startups need to raise finance.
Most startups need to raise finance to scale their business or gather funds for future growth. (Some people fail to realize there is more to raising funds than just financial aid such as capital or revenue expenditure)
Raising finance helps firms gain credibility. (When a startup is able to raise finance by venture capitalists or angel investors, they show that field experts see the potential in their idea.)
Other factors ( These channels of raising funds also provide guidance, mentorship, and most importantly, access to a larger network; furthering opportunities for your startup.)
Finance is needed for numerous purposes and different purposes need sources of finance that are most suitable to them and their requirement. When choosing an appropriate source of finance some factors have to be considered and analyzed properly.
Factors to consider when choosing an appropriate source of finance is:
The amount of finance the organization wants to raise: Not all sources of finance provide all amounts of funds. Some sources are not able to raise large amounts of funds whereas others are not flexible enough to put up with the small sum of money the business requires. Therefore it is important to identify the amount of money required by the business to choose a suitable source of finance. For example, borrowing a commercial loan for a small and short-term cash-flow problem is unwise because loans may have a minimum amount that can be borrowed so taking a bank overdraft would be wise where money can be borrowed in small sums and bank overdrafts can be paid back quickly. Therefore the amount of money required is a key factor in choosing a source of finance.
The amount of time the business can spend on collecting funds: If the business has plenty of time before its financial needs need to be met then it can spend time on searching for cheap alternatives of sources. On the other hand, if the business requires the funds as soon as possible then it would have to make some cost sacrifices and accept a source of finance that may even cost higher. For example, issuing shares is a very long and complex process where there are legal requirements and then the potential shareholders have to be informed (advertising), after all these the money is collected through the process of application and allotment which takes more time.
The cost of the source of finance: Different sources of finance have different costs. It is always more profitable for a business to seek and obtain cheaper sources of finance. Internal sources of finance are always cheaper than external sources of finance. Sometimes however the time does not permit organizations to look for cheaper sources of funds.
The risk involved: it is the sureness of success of the project. If the provider of funds is not confident that the business in which his money is invested is less likely to reap, returns then he would be reluctant to provide the business with funds. In that case, the money can be secured against an asset as collateral which will encourage the lender to lend.
Duration of finance: It can be for a short-term (within one year), medium-term (one to five years), or long-term (five years and more) time period. By identifying the length of the requirement of finance the organization can eliminate inappropriate sources of finance and choose a source of finance that is more suitable for the required time frame.
The control of the business: Issuing shares in public limited companies also gives the opportunity of takeovers to outside parties. The same can be said for venture capitalists where the money is invested as equity and being owners the venture capitalists have the right to influence how the business is run. The existing shareholders and owners of a business who would not want any change to arise in the control and ownership of the business would not consider sources of equity finance.
There are different source of finance and different purpose finance for your startup. we understand that it's already difficult to focus on several task and functions that are related to your business but also to stay ahead in your finances management game. The purpose is unique as your business requirement and different factor related to it .so it important to choose the right source of finance business as it’s going to have long lasting effect.
the key things to ask yourself before deciding what the best source of finance is for your company is:
How much capital does your business require? (For large amounts of capital, you should be looking at equity financings such as venture capital and angel investment)
Will you be able to repay debt financing?
What is your equity dilution (you should have at least 75% if you are an early-stage startup)
Do you need additional resources such as knowledge and enterprise apart from just monetary funding?
We hope we have made it a little easier for you to pick the best source of finance for your startup. Reach out to us to find how we can help your business. Click on connect
Flyboat trying to make the startup fundraising journey as easy as possible, especially when it comes to financing. We always try to help our clients with our best expertise and experienced resources to deliver upon the expectation.
If you’re ready to take startup to next level!! we can help you in preparing pitch decks and financial models and offer consultations for their funding process ( on business model refinements, funding evaluation, getting your investment thesis sorted, and other such aspects.) - We do it for you!