Sources of Funding for Start-ups
Hypothetically, let’s say that you have recognized a space in the market and have compiled a business plan to take advantage of that space. You already have a pretty solid idea of what your product will be and you’re already planning for a prosperous financial future. First, before you start your business endeavor, you need the funds to afford all the things that are required — equipment, staff, and research materials to base your marketing strategy from. From here, you have to make a wise decision when you select the source of your funding. This is where the crucial business plan comes into play.
There are several sources that invest millions of dollars each year into start-up businesses.
Family and friends
Though it may not always be any individual’s desire to borrow money from family and friends, they are the most accessible and reliable source of funding. According to a variety of information gathered by Venture Beat from the Center for Venture Research, the U.S. Small Business Administration, Angel Resource Institute, and Angel Capital Education Foundation, this direct source of funding accounts for 38% of the start-up businesses that around funded and have invested around $6 billion a year. Of course, when it comes to this source it’s of the utmost importance to not let this kind of funding affect the relationship in a bad way. As dire financial situations are often a problem within families, you shouldn’t let the obligations of borrowing money slip your mind.
Although it’s only to a small number of prospects, venture capital firms normally offer the greatest allotments for funding. The average amount given to a start-up business is roughly $2.6 million, but they’re only obligated for helping less than 1% of the start-up businesses they choose to fund. Additionally, although they may have the most money to give out, venture capital firms normally ask for a large part in your business. The average allotment given to a company in the initial stages of development is roughly $2.6 million. Although, they’re only responsible for assisting 0.05% of the start-up businesses that are funded. In a sense, it all depends on what you need to get things going, but when borrowing from these firms you need to have an open mind in letting go of full-ownership. Even if you’re okay with those terms, you’ll still need a well-built business plan and pitch to lean them towards you’re endeavor.
Personal savings and lines of credit
Starting any kind of business venture really requires a sense of dedication and desire. 57% of funded new businesses obtain their funds from themselves. If one took a starting business owner’s personal savings and credit that is invested into their business, it would total somewhere short of $50,000. Though it involves many tedious legal steps, a start-up business owner can even tap into their IRA or 401k if they wanted.
Similar to venture capitalists, angel investors are another source of financial backing that generally requires the right to a stake in the company in exchange for a financial allotment. Unlike venture capital firms, they provide less money, approximately $75,000, and have more clients they loan to. For example, just less than 1% of starting businesses are funded by angel investors. The utmost importance of having a well-crafted business plan is still no exception for them either. You must ensure that your business idea is credible so hiring a business plan writing company might be in your best interests.
Serving as one of the more accessible, straight-forward options, banks provide funding for approximately 1.43% of early-stage businesses. Out of all the loans they permit, roughly $140,00 being the average allotment. Banks are often sought out when needing funding and it shows as the U.S. Small Business Administration gives out around 100,000 loans to beginning businesses each year.
Surely any person who’s read a business blog before is vaguely familiar about the attention that crowdfunding sites, such as Kickstarter, has garnered. Currently, it’s the quickest forming source of funding and isn’t expected to stop growing for awhile. It was projected to exceed $5 billion in 2013, which was coming from $3.2 billion in 2012. Compared to the other places that fund businesses, their average allotments are minuscule with an average of around $7,000. Although that’s much smaller, the sheer volume of businesses seeking funding helps to counteract. For those that aren't living under a rock, you are surely familiar with the sharp rise in popularity of crowd funding sites like Kickstarter. Currently, it is the fastest-growing source of funding and it’s expected to exceed $5 billion in 2013, which rose from $3.2 billion in 2012. The average amount of funding payments are minuscule compared to other sources, topping off around only $7,000.
A number of criteria for your company will decide on what source you should reach out to for funding. Whether it’s a start-up businesses or an established one that’s simply seeking financial backing for a new project, you must think about a number of factors — amount of funding required, if you’re willing to let go of full-ownership, or if you’re willing to gain some debt to get things started. You must take heed when thinking about this important factors. Additionally, as in all scenarios of starting a business, you must create an effective business plan.