It’s a huge step, but every year millions of people take the plunge and start their own small business.
Turning that initial idea into reality is not without its challenges though, least of all coming up with the funds to pay for initial startup costs like salaries, a building lease, fit outs, new equipment and utilities bills.
The good news is that there are potentially a number of financing options at hand for budding startups, though you might find that it’s not quite as simple as walking into your bank to ask for a loan.
Read on below for a quick run through of some of the most popular new business funding solutions, as well as some of the pros and cons involved.
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Second income or savings
Not every startup founder is going to have the cash on hand to cover the costs of starting and maintaining a small business, but if you do, it could be one of the most cost-effective ways to fund your operations – at least initially.
That could be with savings you’ve accrued for this purpose, or as many business owners do, using the income generated through maintaining full time or part time work elsewhere.
These methods, which rely on no external funding support, are often referred to as bootstrapping. And while they may require a lot of personal sacrifice (in both time and money), it’s a way of funding your startup that won’t require you to cede control to any outside investors or to meet the requirements of a bank or lender.
One of the most common funding resources new businesses turn to are business loans for startups. Business loans, either from a traditional bank or an online lender, have the advantage of offering a large range of capital (generally $5,000 – $500,000+), via a secured or unsecured loan that can be paid back over months or years.
Of course there will be an interest rate attached to the loan and often fees as well, but these might be a small price to pay for a boost in cash flow or the funds to purchase essential equipment.
The catch is that both banks and online business lenders generally set requirements for up and coming businesses to meet, in order to mitigate their lending risk.
These often include a minimum trading time requirements (generally six months) and minimum revenue requirements (generally upwards of $50k/year minimum turnover). In most instances this means that a business loan isn’t going to be a viable option for a business which has literally just opened its doors.
Personal or business credit cards
The other form of credit you may be able to use to finance your startup is a credit card – either your personal card, or a business credit card.
While credit cards don’t offer the same potential borrowing power as a business loan, they can be seriously useful for day-to-day purchases and cash flow management.
Of course, the major advantage of a credit card is the interest free days you’ll be able to make use of if you continue to pay off your outstanding balance each statement period, plus there are often handy perks such as rewards points and complimentary insurance offers attached.
You will have to weigh those benefits against any annual fee though, and if it’s your personal card, the time it may take to decouple your personal and business finances come tax time.
Venture capital from private sources such as venture capital firms, investment banks and superannuation funds, or from a wealthy individual (an angel investor) could provide a serious funding injection for your new startup.
As you’d expect, this is not free money though. In order to provide funding, venture capital investors will generally require a share of equity in the business as well.
But because these firms or individuals have a vested interest in your startups success, it’s not uncommon for venture capital to also come with ongoing guidance and advice for your business.
Depending on your location, the field you are in and the purpose of your business, there may be one or many government grants, funding initiatives for support programs open to you as a startup.
Just bear in mind that government funding is often targeted at startups in specific fields such as science, technology and medicine, plus it can be competitive. It’s not as simple as just being handed the money, because you’ll likely have to go up against other new businesses who are also applying for funding.
About Tom Watson
Tom Watson is a Finance Journalist and business banking expert at financial comparison site website mozo.com.au. He is passionate about providing Australian businesses with the information and insights they need to make more informed choices about their financial products.