Starting a startup business is sometimes complicated and involves multiple factors. Startup funding is one of them. It is the money used to start and handle different aspects of a business.
It’s pretty common knowledge that to start and run a company, you need money. Get the money, invest it in the company, and make a profit from it.
However, you need to understand all the ins and outs of startup funding before you get your organization started. It will help you gather funds easily and utilize them wisely for better output.
In this beginner’s guide, I am going to discuss this term in detail. Let’s start.
What is Startup Funding?
Startup funding, also known as startup capital, is the money you need to invest in a startup business. This fund is gathered from multiple sources depending on the entrepreneur and the company he’s starting.
According to a study, around $531 billion is raised as startup capital each year. Only $185.5 billion comes from personal savings and the rest of it is gained from multiple sources.
To gain a proper flow of funding, understanding its types is essential. It will be helpful in understanding what type of capital you can get and manage to kickstart your company this year. But first, I’m going to briefly explain how it works.
How Does Getting Startup Funding Work?
The working mechanism of capital funding works differently depending on its type. However, a general procedure is discussed below:
- Finding source: First, the entrepreneur finds a source from where the capital will be gained.
- Capital gaining: After finding the source, he offers a proposal that includes the details about how much funds he needs.
- Due diligence: If the investors like the proposal, they conduct due diligence which involves understanding the business model, marketing opportunities, and success rate.
- Agreement: After analysis, the source makes an agreement with the entrepreneur. It includes details about the amount of equity, repayment method, etc.
- Investing the fund: Now, the entrepreneur invests the fund in the company and makes a profit from it.
Types of Startup Funding
Here are the details of its types:
Personal Savings:
Personal savings are the first capital funds type entrepreneurs utilize. It is common sense that anyone who’s willing to start a company they believe in will be ready to invest their savings before anyone else.
Investing their own money not only kickstarts the business but also creates a strong investment case for other investors. In simple words, when big investors see that a person believes in his company and is putting his savings into it, they are more likely to source capital as well.
Loan From Friends and Family:
The second source entrepreneurs rely on is a loan from friends and families. They ask for financial help from the close people who believe in the business. It is a very common and beneficial type of capital since it does not involve giving as much explanation as required for other investors. Still, it involves some type of formal agreement which includes agreement details for the future.
Venture Capital:
Venture capital is a type of private equity funding provided by different VC firms or individuals. These investors usually give capital to businesses that have a high potential for growth. As a return, they take a specific percentage of equity. VC investors usually invest in innovative and scalable business models. The benefit of picking this startup funding type is that it gives access to a huge sum of money. Also, you do not have to repay it since it’s returned in the form of equity.
Angel Investors:
Angel investors is a term used to describe people with high net worth who invest in businesses that are in the early stages. These investors usually use their personal money as capital and give it to businesses they believe in. Unlike capital ventures, the amount of money you receive from angel investors is low. However, there’s no pressure of immediate growth while working with such investors.
Bank Loans:
Bank loans are one of the most common forms of investment capital startups use. In this type, businesses take loans from financial banks and repay them with interest in a decided period of time. It’s a great option for businesses that already have a little bit of momentum and are making a fluent profit. Another benefit of this type is that you can apply for a large amount of money as well.
A Beginner’s Guide for Gaining Startup Funding
The following guidelines can help with it:
Step 1 – Analyze Business Needs:
First and foremost, you need to analyze the business’s need for an investment. It includes analyzing multiple factors such as calculating operational costs and marketing budget. Also, you need to understand how you’re going to repay the capital. Will it be in the form of money or equity?
Step 2 – Compare Capital Options:
Now, compare all the options you have for getting funding. Comparing will help in picking the best option of funding which will help the business both in the start and in the long term.
Step 3 – Apply for Funding:
After picking the right option, apply for the funding according to the relevant procedure. For example, taking a loan from a bank will require business documents and a good credit score. On the other hand, applying to angel investors will require a good business pitch.
Step 4 – Return the Capital According to the Agreement:
After getting the funding and running the business smoothly, repay the capital according to the agreement. For angel investors, you will only have to give the equity percentage. For banks, on the other hand, you will have to repay on time with interest.
Conclusion
Understanding startup funding as a new entrepreneur is necessary. It is the money you’re going to use to start and run the business. It can be used in different departments of a business such as marketing, resource purchasing, etc. The funding types I’ve discussed already are all different in nature. They are suitable for different types of businesses. So, analyze your needs first and then apply and get the capital from investors.
Frequently Asked Questions (FAQs)
Are personal savings enough as startup capital?
It depends on how much savings you have and what type of startup you’re going to start. If you think it doesn’t need extra help, using savings only is enough.
Is taking a bank loan beneficial for a fresh business?
Probably not. Picking other options over a bank loan is more beneficial for fresh businesses.
Can a friend or family member be my angel investor?
Why not. If that person is capable of lending a huge sum of money, consider him your angel investor.
