What Type Of Financing Options Exists When Starting A Business From The Ground Up?
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Published on: 31 January 2022
Last Updated on: 08 November 2024
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New businesses are created every day. For example, Australia recorded 365,480 new businesses in 2021, 17,200 in India, 340,500 in the UK, and in 2020 alone, 4.4 million new businesses were created in North America. If you’re one of the many entrepreneurs thinking of starting a business – you’re in good company.
As the saying goes, “learn to walk before you run,” and when it comes to starting a business, it pays to do your preparation, such as developing a thorough business plan, knowing who your target customer is, and setting up an appropriate business structure.
PS – You can learn more about these foundational steps in a previous blog post published here.
Let’s start with bootstrapping.
How To Start Your Business From Ground Up?
This means that when you are starting a business, your idea is entirely self-funded. That is, you’re not borrowing money from any individual or entity. According to the Chamber of Commerce, 75-80% of new businesses are self-financed, while less than 16% of new ventures are assisted with a bank loan, and 1-2% receive some form of loan from family and friends.
1. Develop A BullsEye Business Strategy
When it comes to the advantages of being a completely self-funded business, it usually boils down to one thing – having complete control of the business in terms of strategy, priorities, and use of resources. Many household brands started off in a garage and bootstrapped their way to success. These include Microsoft, Apple, HP, Disney, and Amazon.
The downside of being self-funded is that you’re limited to your existing cash reserves. For example, a business opportunity may present itself but will require significant investment, which you do not have access to without turning to a lender. What this means is that you are starting a business that may take much longer to grow without external cash flow, and this is where financing, such as a business loan, comes into the picture.
2. Accumulate Your Business Funding
In this business loan information guide, you’ll be able to know that, a business loan is a common way for new businesses to grow, pay for capital expenses, or to inject cash flow to meet payroll and other business-related expenses. Across all banks in North America, the average small business loan amount is $633,000 (source).
Business loans from a commercial bank typically fall under two categories: secured and unsecured.
A secured loan is a loan that uses the property as collateral. What this means is that if you fall behind in repaying the loan, the lender can seize the asset if they cannot recoup the balance from selling it.
On the other hand, an unsecured loan is a type of loan that does not require collateral as a security or guarantee. Generally, credit cards and lines of credit are examples of unsecured loans, as the borrower does not have to provide any property as repayment if they default on their payments.
Accessing additional cash flow from a bank can cover various forms under the umbrella term of a business loan, and this guide from Westpac explores three types: business loan, business credit card, or overdraft facility. Get all the information before starting a business project.
3. Business Grants And Loans Are Different So Pick One According To Your Requirement
Outside of a business loan, you may be eligible for a small business grant. Generally speaking, business grants are offered by government agencies, a company, or philanthropists, and their very existence is to give small businesses a helping hand.
The biggest difference between a business grant and a business loan is that with a business grant, you do not have to repay it. It is essentially free money. However, grants tend to have particular eligibility criteria; competition for them is high. Compared to getting a business loan, applying for and getting the funds from a grant can take significantly longer.
Here is a list of government websites around the world where you can see what business grants may be applicable for you while starting a business.
- https://business.gov.au/grants-and-programs (Australia)
- https://www.gov.uk/business-finance-support (UK)
- https://www.sba.gov/funding-programs/grants (North America)
- https://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/home (Canada)
- https://www.businessgrants.gov.sg/ (Singapore)
- https://www.malaysia.gov.my/portal/content/27555 (Malaysia)
- https://www.business.govt.nz/how-to-grow/getting-government-grants/grants-and-help-for-your-new-business (New Zealand)
Another source of cash injection that you may consider is angel investment. An angel investor is often a wealthy professional or a serial entrepreneur who provides money for startups. They provide help and funding for businesses that might not have had the funds to get started without them. But like most financing options, angel investment isn’t money for nothing – often, you will have to give away a chunk of ownership in return, and with this comes a loss in control and increased pressure to produce returns.
Conclusion:
In conclusion, there are many ways to fund your new business, and each has its benefits and drawbacks. Also, seek advice from an experienced tax professional or authorized financial advisor to better understand what solution is best for you for starting a business.
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