Funding is a common issue for established businesses or even for a startup. Investors are very apprehensive and careful when they put in money in a business, whether it is a lending company or a friend or a family member, especially in a startup as it is typically run by someone who has very little or no previous experience in entrepreneurial matters.
Experience is a very important factor for funding as well as running a business because it will help the entrepreneur to make the right decisions at the right time. It will also help them to deal with any unexpected or difficult situations in the most effective and timely way.
Moreover, the fact that the startup has idea only on paper and not on practical trading like an established business probably discourages the investors to come with funding for a startup. This is why the investors strongly prefer investing their hard earned money on a multi-billion dollar prospect and a business that follows a tried, tested and sustainable business model that has a lot of existing customer as well as an existing history of trading.
Reasons for startup failures
Startup entrepreneurs often come up with lots of interesting and innovative ideas but seldom find effective ways to implement their ideas. They often fail to get their business running and the most significant reason for a startup to failis that they fall short of cash at some point of time or other.
As a study by CB Insights indicate, there are several other reasons of a startup company to fail but funding seems to reign supreme as more than 29% of the people polled corroborated this fact. However, this is the second reason to the most popular reasons for a startup to fail. Apart from lack of funds and no market need at the top two positions in the list, the other reasons cited include:
- Not having the right team to work with
- Getting outcompeted by other in similar business
- Poor product designed and manufactured
- Cost and pricing issues
- Poor marketing strategy and ineffective advertising of products
- Lack of proper business model to attract sales
- Ignoring customers satisfaction aspect
- Mistimed products
- Losing focus on business goals
- Pivot gone bad
- Disharmony among team members and investors
- Lack of passion
- Bad location of office or factory
- No financer or investor interest for their type of business
- Legal challenges faced that prove costly or impossible to tackle
- Burn outs
- Failure to pivot and
- Not using network and advisors.
Therefore, it becomes the primary duty of the startup owners to assess their business condition and need of finance amount. It is also important for them to make sure that the required cash is available at the time of need.
Another common issue faced by the startups when it comes to finding cash for their business is the reluctance of the traditional money lenders to loan them money. They fear that their money will be lost as a startup is always a high risk prospect no matter how good the credit score is for the owner of the business as an individual. It is for this reason startups often look up to alternative sources and sites such as libertylending and others.
However, getting the required funding for a new business is not an easy job irrespective of the fact that the volume of startup funding has increased significantly over the years. It is only a very small percentage of startups that actually get the funding they need. This is because all investors have specific demands and terms for the startup funding. This includes a strong management team, reasonable business plan, sustainable competitive advantage, and much more.
Need for funding
The required funding is the safety valve for them when profits are low and expenses are high. This cash will help them to provide them with the necessary stability and to ensure production is not disrupted due to unexpected and problematic events. A proper funding will help the start up in a wide range of other needs as well such as:
- Making some sort of investment before starting the trading process
- Making sure all required assets are in place such as infrastructure and machinery
- Designing the website of the company
- Meeting all its financial obligations such as paying the suppliers and bills and salaries of employees on time and
- Keeping provisions for growing and expanding their operations.
Therefore, proper funding sets the stage for a startup to start trading and acceleratethe pace of its growth.
Sources to look for
There are different sources that a startup company may look for funding and any one or a combination of it may be chosen only after conducting a thorough and relevant research.
- Bootstrapping – This is when an entrepreneur funds his or her own business from personal savings, existing job, credit cards, investments, and remortgaging house. It is the most common source of funding.
- Own network – This is the resource comprising of colleagues, friends, partners, and family. If the person is supportive to your business idea, you can get the desired funds as a loan having a flexible repayment schedule and terms. You may also be given money in exchange of a stake in the business profits.
- Grants – These comprises of government funds especially. These grants are offered free of charge and are designed specifically for supporting new technologies and other important causes such as education, social and medicine needs. Grants can come in different kinds and based on the type of business and its demographics such as grants for women, single mothers, minority business owners, and more.
- Bank loans and overdrafts – You can approach banks for necessary funds provided you have a solid business plan and positive revenue projections. However, as banks are skeptical towards startups, you may need to give collateral for such funding.
You can also approach Business Angels who are wealthy individuals who provide funds in exchange of a percentage of stockin the company. Equity and reward based crowd funding are also useful sources that you may try apart from Venture Capitals and incubators.
Kelly Wilson is an experienced and skilled Business Consultant and Financial advisor in the USA. She helps clients both personal and professional in long-term wealth building plans. During her spare time, she loves to write on Business, Finance, Marketing, Social Media. She loves to share her knowledge and Experts tips with her readers.