The financing options for a startup business largely depends on the company’s business, industry and capital requirements.
Entrepreneurs can narrow down the viable ways of getting money to fund a new venture by understanding their business and the type of financiers who may be interested in providing capital to them.
For example, the financing alternatives for a new restaurant business will be very different to the funding of a hot tech startup. So, do your research and don’t waste time knocking on the wrong doors.
In general, there are a few ways to raise capital for a startup – equity financing, debt financing and business grants.
EQUITY
With equity financing, the people who provide capital will be investors who want to take a stake in the startup in order to have ownership and a share of future earnings.
The returns for equity investors will come in the form of a capital gain when selling the shares owned for a higher price and from any dividends that the company decides to pay when generating profits.
DEBT
In contrast, debt financing from bank loans and other debentures do not affect a company’s shareholding structure. Instead, borrowers have to make interest payments to compensate the lender for provding the loan.
The interest rate charged by loan lenders will depend on market rates, the company’s nature of business and the risk of default in paying the interest as agreed or the repayment of the principal amount lent.
GRANTS
The other potential source of capital is from government grants for startup businesses. Depending on where you live and the type of business you intend to pursue, there may be a number of state and federal grants to help small startups which are applicable to your venture.
Needless to say, if there’s a grant available and you can get it, then it’s the most attractive financing option for any startup company. With a grant, no equity needs to be given away, no interest needs to be paid and in many cases, the principal doesn’t have to be repaid.
It’s almost like free money and any startup should consider it before exploring other options, or at least, it should be investigated in parallel with debt or equity alternatives.