We all have a startup dream don’t we? We, the would-be entrepreneurs. It always starts off in a garage somewhere or some other space that’s too small to cost too much. We take out a loan from the bank. Plough it in to the business and work our socks off to pay it off. That’s a good plan but it’s not easy to follow through on. Currently the going rate for business/startup loans is somewhere around the 18% mark, that’s a lot of interest. And, since you cant expect to make much from your business in the first few years anyways, repaying the loan will be a long term milestone for you. Such high Interest rates make Banks very unfavorable since most of the other sources of finance have lower required rates of return. So, the question is; what can we do to avoid drowning in debt? The answer to that is twofold, the source and use of fund.
Being a startup means you have a very limited spectrum of sources to choose from. It is imperative that you find the cheapest source of funds available. Viable sources include Angel Investors, Venture Capitalists and Crowd Funding, of which the last one is fairly new. Both Angel Investors and Venture Capitalists provide you with funds that you don’t have to pay back immediately. They bank on the hunch that your company will be a success later on and they can reap greater benefits from you then. Yes, in the end, you might have to pay more to these investors than you would have had to pay to banks but the thing is that the investors don’t take your money when you need it the most, which is during the first few baby steps of your business.
The third option mentioned above; crowd funding is all the hype these days simply because it is the cheapest source of funds. However, in order to successfully crowd fund a project you need a product that is ‘likable’. For instance; you can crowdfund a flying car but cannot do so for an accounting firm. Why? Because the former is new and more exciting that the later.
Such sources are out there but finding them is completely reliant on your networking skills. You have to know people, people who are looking to invest or people who can promote your product to potential investors.
Preparation is also key when starting a business. You need to know what you are going to do and how you are going to do it. However, the whats and hows need to be specific. You need to know next how you will spend your funds and believe me when I say that the term ‘less is better’ vehemently applies here.
Do not spend excessively. Don’t hire 10 employees when you can make do with 5. Don’t buy 5 laptops when you can make do with 3. Don’t rent an entire office space when what you do can be done from a single table in your own apartment. You will be suffering losses initially (almost guaranteed) so it would be prudent to mitigate said losses as much as possible.