Are you in possession of a unique business idea that you have made a plan for, and the only thing you need is a way to finance it? In most countries, there are many ways to get funding when you want to start a business.
In the following paragraphs, we will share some good and simple financing options, with upsides and downsides to each method, so that you may consider the most fitting alternative for you and your company. Here is what we’ll cover:
- Family, friends, and acquaintances
- External loans
- Angel investors
Financing a business with equity means that the business owners put in the money themselves. This is often the first natural option you should consider for your startup. You may have been saving for years to capitalize on such an opportunity, which is the ideal situation for this method. What’s usually the case, though, is that you don’t have enough equity, and thereby need some other ways on top of this one to fund the whole startup.
By financing your business with equity you only use your own money. We repeat that this is usually the first and best option, as it only makes you accountable for the money that you yourself have put into the project. But in any case, you want to make very sure that you’re pouring your hard-earned cash into a viable idea.
Family, friends, and acquaintances
Despite the initial resistance you may feel at asking your family and friends to lend you money for your startup, this can actually be a good solution – as long as you write a contract. These people may be very happy to help you out, but in case your business idea fails, you don’t want to get stuck between a rock and a hard place by not being able to pay them back. This can not only ruin your capitalistic dreams but also your close relationships.
In case you consider starting a sole proprietorship and using a personal loan for financing it, there are some important things to consider. The upsides are that these loans give you quick and easy access to money, which is usually preferable when your idea is hot and the emotion is strong. In addition, there is also no security in these loans, which means you won’t have to put up any of your belongings as payment security for the bank.
You should be aware of this, however: personal loans are private loans that you are fully accountable for paying back. If your business goes bankrupt and you’re not able to pay down the loan, you may fall into debt that can be hard to pay back. It can also make it harder for you to get loans in the future, according to the Norwegian fintech company Lan for deg. In their article on “Forbrukslån med betalingsanmerkning,” they write about how payment remarks prevent you from taking up personal loans. When you have a history of not being able to pay your bills, on time or at all, the bank doesn’t have any safety that you’re going to do so when taking up a new loan. This fact further proves just how personally accountable you are for this financing method, as opposed to only putting your own equity into the business.
As you saw above, banks want to feel absolutely safe that you’ll be able to pay down the loan they give you. Angel investors, on the other hand, are quite a different breed. They thrive on funding entrepreneurs who “think outside the box” and come up with new and unconventional startup ideas. By buying stocks in the company, right from the start, angel investors make themselves an important part of a potential gold mine.
These people are usually wealthy enough to handle a few setbacks, and they are bigger risk-takers than the average friend, family member, or bank. For more information on finding an angel investor for your startup, we recommend that you check out an article written by The Balance Small Business, “How to Find Angel Investors.”
With the four startup financing tips that we have outlined above, we hope to have given you a diverse set of opportunities that suit you well, whether you have enough equity yourself, wealthy friends, or are open to considering personal loans and angel investors.