Essay Example on Navigating the Funding Landscape: A Comprehensive Guide to Startup Financing Strategies

Today, most people are considering starting their own businesses to provide services and products, that are in demand; however, funding is a major concern. First, to start a business, one needs to consider the best source of funding to facilitate the first stages of operations. The criteria for funding eligibility are different from various sources; for instance, the amount of funding required is based on the type and size of the business (Hofstrand, 2013). For example, retail requires less capital compared to the processing business, which requires large capital to get started. Secondly, determining the type of financing, which can be in the form of debt or equity. Equity involves exchanging ownership for financial investment; therefore, the investor owns shares, and part of the company’s profit, equity cannot be returned to the investor (Fehr & Hishigsuren, 2006). Debt financing involves borrowing from creditors and repaying after a specified period with interest. Financing a startup business is vital to giving it a competitive edge, a high return, and building it up. The paper examines the type of funding sources, the challenges faced to secure the finances, and how startup businesses can overcome these problems.

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Personal financing funds are from friends, family, colleagues, and professional networks, referred to as angel investors; the funding may be in the form of equity or debt. Equity financing involves friends and relatives who receive an ownership interest in the business. Equity investment is the best for technology firms, and small plant owners, and not for small shop owners. The challenge of getting funds from angel investors include risking their finances and personal relationship. The owner is at risk of losing the business in exchange for money; additionally, angel investors are involved in the decision-making process.

Angel funding in the form of equity should be made official, just like other investments. It entails defining relationships, setting the terms, and determining the amount (Fehr & Hishigsuren, 2006). If the funding is in the form of a loan from friends and relatives, it should be formalized just like that of professional creditors. A business plan can be formulated to attract angel investors, and a professional loan document should be drafted stating the agreement. The loan documents should include collateral assets, amount, interest, and payment period. Angel investors tend to focus on investing in regions they are located in because of certainty about the business. Private investors focus on the security and returns of a company for investments. Unlike private investors who do not concentrate on initial funding, angel investors are involved in initial financing with little funds.

Private investors are sources of financing from companies or individuals from formal non-traditional large-scale private investors. They are called venture capitalists who invest in private startup companies in exchange for shares. Venture capitalists invest a tremendous amount of capital in a business. A challenge is that venture capitalists focus on a company with the potential for high growth; in that respect, they do not engage in initial funding unless the company has good management, profitability, and competitive advantage.

Additionally, their goals are short-term of high returns and may be part of the company’s decision-making process. However, private investors are focused on high-risk investments with an annual profit of 25%; in return, they expect a 50% return (Hofstrand, 2013). An advantage is that venture capital investors offer training, advice, and guidance essential to startups and huge capitals that will result in growth and high profit.

Government and banking are common sources of business financing. Startup businesses may find it hard to secure funding from banks because they require collateral such as real estate, a good credit record and business track history, and a positive business plan. When the statements are provided, the business can borrow additional loans in the future.

The federal, state, and local governments may provide financing programs for small and startup businesses. The funds are often from a lender, and the government is the intermediary that offers a guarantee for repayment of the loan for small businesses with limited assets. Government loans are often subsidized (Parmar, 2005). Small business administration loans (SBA) are backed-up loans from the owner-registered bank. SBA acts as a guarantee to repay the loan to the creditor if the owner defaults. It is a good option for small businesses that would otherwise not qualify for a loan.

Bootstrapping financing uses revenue and profit from business activities and immediate commerce operations. Compared to other forms of funding, bootstrapping or self-funding is considered the best and cheapest when investing in a startup business. Additionally, it is flexible in terms of quick availability, and the owner is the decision-maker. Personal savings is one way of bootstrapping to boost the growth of an organization. For example, GitHub, a hosting service company, was a bootstrap startup by Microsoft in 2018 (Klacmer Calopa, 2017). Other bootstrapping methods include sweat equity as part of a business’s contribution because of their effort, customer funding through sales, personal debt, and confidential credit cards. The challenges include raising funds if the company does not have enough capital. Lack of experience can result in a lousy decision-making process, making it risky because the business can collapse easily. To overcome the challenges, startup companies should monitor profits and develop practical skills when making decisions.

A startup business must establish the most suitable funding source to increase the chances of acquiring funds. The challenges of different funding sources should be evaluated; it is essential to have some money or assets when starting a small business. Transparency and accountability to investors are necessary because they build trust. The creditors should be informed of the progress and any plan to change the course of business. The money should be managed appropriately for higher returns to help honor the agreement.

References

Fehr, d., & Hishigsuren, g. (2006). Raising capital for microfinance: sources of funding and opportunities for equity financing. Journal of developmental entrepreneurship, 11(02), 133-143. Https://doi.org/10.1142/s1084946706000301

Hofstrand, d. (2013). Types and sources of financing for startup businesses | ag decision maker. Extension.iastate.edu. https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html.

Klacmer Calopa, m. (2017). Business owner and manager’s attitudes towards financial decision-making and strategic planning: evidence from Croatian SMEs. Management: journal of contemporary management issues, 22(1), 103-116. Https://doi.org/10.30924/mjcmi/2017.22.1.103

Parmar, b. (2005). Money [startup company venture capital fundraising]. Engineering Management, 15(4), 34-37. Https://doi.org/10.1049/em:20050409