Let’s face it, being a startup is hard. It was found that 90% of startups in the US fail, due to either running out of cash, being outcompeted in the market, or not having a product that is right for the current climate. To make a successful startup usually requires some sort of initial and ongoing investment, so let’s explore some of the ways you can borrow money as a startup.
Crowdfunding to borrow money
One of the most popular routes of borrowing money as a startup is through crowdfunding. This is essentially asking lots of individuals to input a small amount of cash, sometimes as little as £10-£100, for either a discount on the product you are offering or a small equity percentage, that could provide decent returns if the business does well.
The main sites for crowdfunding are Kickstarter, which is mostly for physical products that are looking to launch, and Indiegogo, which is primarily used for tech and SaaS companies looking to get funding for their online business. You must be careful on these sites however as some of the platforms have terms and conditions that if you don’t get all the money you are asking for as a fundraising target, you walk away with nothing.
Family and friends
Relatives and friends can be a great way to borrow money as a startup. If they can help you out, it can be easy access to money, but you should make sure they know they are investing into a project that could do really well, but also fail.
Jeff Bezos of Amazon accepted an estimated $250,000 from his parents when he was starting the company in 1995, and after giving them equity in the business, that is estimated to be worth $30 billion today. Of course, some startups nowadays don’t need nearly as much investment to get off the ground, but if your friends and family are happy to lend for a percentage of the business it can be a great way to get started.
Most businesses when they get started will look to a bank for an initial loan that can be paid back over a specific time period. Unlike venture capital firms, banks don’t ask for a percentage of your company, but instead charge a rate of interest for the loan, which must be paid back.
Justine Gray from consumer finance start-up Dollar Hand commented that “If you are looking to retain full equity of your startup and understand the risks of borrowing money from a bank, this can be a great way to borrow money as a startup.”
She continued that “Business loans under £25,000 can normally be applied for directly online. If you need more than this, you may need to visit a branch to discuss your funding requirements. Always make sure to shop around as some banks and lenders may have more favorable rates and payment terms than others.”
Venture capital funding is what most startups that are more established will look to go for. The venture capital firm will often look for a percentage of the business for the money that they are giving, based on the current, but in some cases also the future value of the business. Some SaaS companies can be very profitable for venture capital firms, as when sold, these businesses can sell for a significant multiple of their annual revenue (median is 13x revenue), according to Blossom Street Ventures.
Additionally, you can look at government grants which can be available for different purposes or circumstances, whether you are working in green or sustainable technology, charities, research and development or running your startup as a young person. A grant is completely interest and equity free and can range from a few thousand dollars to several millions.
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