According to statistics, 50 per cent of business startups fail within the first four years.
The same statistics show us that 30% of small businesses are losing money on a continual basis and over 80% of businesses fail because of issues with cash flow.
Although entrepreneurs may form businesses based on charity, community issues and a strong desire for change, the finances of a business are what makes it successful. A business is not a business unless it is making money, so how well a business does always comes down to the finances.
There are lots of things that you can do to prepare yourself for the finances involved in starting and running a business. Learn some basic accounts skills, understand how to record your numbers properly and seek professional help and advice if you need it. There are endless Youtube videos and lengthy articles offering guidance, and your research will be a weekend well spent if you want to feel at least a little in touch with the financial needs of running a business.
To get you started, we’re going to give you a quick rundown of some of the most common forms of business funding. Funding is something that you’ll likely need eventually to grow, or even just to keep going until you start making a profit as most startups take a whole 3 years to start turning a profit.
Here are some of the most common types of business funding and how they work:
Your Own Savings
Self funding is the primary way that entrepreneurs fund a startup.
Most business owners save up their own money to start the business of their dreams and it really is a good way to start a business because you owe nobody else by funding this way. It also enables you to keep complete control over your business, control over how the money is spent, and you get a sense of pride knowing you started everything from your own hard earned cash.
The only downside and risk to be aware of is that your savings won’t be there anymore if the business does fail, which is why it can be a good idea to give yourself a cap on how much you allow yourself to put in. It is also worth considering the value of having investors onboard who can offer much more than money in the form of advice and contacts, something you miss out on by self-funding.
A venture capital investment is only about the money. The person providing the investment will invest a lot of money in return for the equity they will get back when the company reaches a certain size or is sold. They tend to offer considerable investment so you are likely to have to give up a huge amount of your equity to get their help.
Loved ones may offer to fund your business or they may agree to lend you some money if you ask them. Clearly, there is room for fallouts with this kind of an agreement or contract so it makes sense to create legal contracts to protect yourself and your family member or friend. It helps to be open and honest so that everybody knows the risks and where they stand, and to clarify who has a say over how the money was spent. Again, just like self-funding you do still miss out on advice and guidance that could be invaluable.
Invoice discounting works by a lender agreeing to lend you money based on the value of unpaid invoices. You could compare it to getting your wages from work in advance before payday. The downsides to this kind of lending can be the risk of the client not paying up, so you end up in debt for the amount you’ve been lent by the lender, and the additional interest you’ll have to pay to the lender to make it worth their while. When you’re established, invoice discounting can be a great option for short-term business funding.
As of April this year, on just one crowdfunding site alone there were over 400,000 campaigns launched. It works by promoting your ‘presentation’ where you tell people about your project and they donate money for different ‘rewards’ such as a sample of a product once it has been made, or a mention on something like a book or website. You do have to work hard promoting and refining your campaign but the rewards can be incredible, especially if you attract new investors.
An angel investor is an HNW individual who provides you with investment in exchange for owning a percentage of the business. They can offer lots of guidance and advice and the terms of their investment can be discussed to work for your needs. The big downside to this type of investment is that the more of a percentage the investor owns, the more of a say they are likely to have over your business.
Bank loans are a common way to fund startups and can work really well for some businesses. There are often different forms of funding depending on what you need and you don’t lose any equity through the loan. The downsides are often the percentage of interest you have to pay back, the fact the money needs paying back even if the business fails, and the fact it can require lots of time and documentation to become a reality.
Understand Your Funding Options To Support Your Future Success
With business finance, it really is a case of the more you know. Understanding exactly which options are available to you will help you to quickly line up opportunities if you need to. Funding could provide financial support to keep you going during a period of growth, whilst you earn enough to turn a profit or to help you invest in important tools like marketing or premises. The more you understand funding that is available to you, the more you understand how many different options you have to help your business succeed.