This article discusses 20 possible ways of how to finance your startup. It gives you a broad overview and should not replace any professional financial advice says Peter DeCaprio.
- The first source of money is the entrepreneur’s own savings and investments, either personal or from other companies he/s he owns. This option is suitable if you have enough capital to start without risking too much.
- A second method is issuing securities such as stocks or bonds that are purchased by investors who hope that their price will increase as the venture grows and makes profits, which eventually can be sold at a profit. The major drawback of this type of financing is lack of liquidity – it takes time to find buyers – and high risk – because price fluctuations may make assets hard to sell.
- Another method is debentures, which are loans that must be repaid. Investors receive stock as compensation for the use of their funds and take on greater risk than with a bond. Debentures usually do not provide preferred stockholder rights such as voting or first claim to dividends and assets upon liquidation.
(1). Accrual financing uses accounts receivable and invoices as collateral for short-term loans. The lender receives payment before its due date and then takes his share of the revenue from the sale paid to the company says Peter DeCaprio. This can help finance operations during periods between investment inflows; it does not require an increase in permanent working capital
(2) This type of financing can range from factoring – selling accounts receivable to a financial institution for cash to discounting invoices, in which the company offering the invoice discounts it at a bank or finance company by giving them an interest in the transaction.
This is essentially lending based on someone’s experience and creditworthiness. These loans are secured by equipment, real estate, inventory, accounts receivable, or other property. A business may borrow against its own assets, use these as collateral for unsecured loans or sell some of them outright to raise funds
(3). A common source of financing is leasing equipment rather than buying it. The lessor purchases the equipment and then leases it back to the lessee who pays monthly rent. While this method allows businesses with limited working capital to get high-ticket items, it is often more expensive than a simple hire/purchase arrangement.
(4) A form of financing that provides an alternative to raising equity capital, borrowing, and leasing are factoring – selling accounts receivable to a financial institution for cash or discounting invoices, in which the company offering the invoice discounts it at a bank or finance company by giving them an interest in the transaction. Peter DeCaprio says the advantage of this type of financing is that you receive all the money upfront and do not have to wait for payment.
Another method of financing transactions involves borrowing through letters of credit: a line of credit established with a bank, guaranteeing repayment and allowing foreign buyers and sellers to conduct safe transactions over time
(5). The major source of credit is the bank itself. You can secure a line of credit up to 90 percent of your accounts receivable or through trade-in agreements on equipment (6).
(7) Another source is factoring – selling accounts receivable to a financial institution for cash or discounting invoices. In which the company offering the invoice discounts it at a bank. Or finance the company by giving them an interest in the transaction. The advantage of this type of financing is that you receive all the money upfront. And do not have to wait for payment explains Peter DeCaprio.
This involves organizing capital from several sources, some public and some private. The main advantage is diversification: if one source fails, others may be available to continue operations
(8). A major disadvantage is that it can be very costly to set up. Also, this type of financing is usually available only to large companies.
As with conglomerates, some businesses are financed by selling stock on the stock market
(9). The buyer of the stock purchases partial ownership of the business and its earnings. This type of financing has risks like any other investment; if your company fails, both you and your investors may lose money. Another risk is becoming public: if your company goes public by issuing stock through an initial public offering (IPO). It loses its flexibility in making strategic decisions
(10). Small businesses can be financed by selling stock or obtaining loans. One major source is factoring – selling accounts receivable to a financial institution for cash
The best way to finance a startup is by having multiple options. Keep your expenses minimal during the early stages of starting up. Peter DeCaprio says to consider all the different sources of financing available and pick those that will be most beneficial to your situation.