Every year, millions of Americans start new businesses. So far, in 2021, 1.36 million new business applications have been submitted. Yet, according to statistics, only half of all businesses survive their first five years. So, why do they fail? The most typical reason for business failure is a lack of funds. Thus, this article discusses funding options that your business should consider to replenish its cash reserves to avoid the likely failure that most startups face.
Bootstrapping can be defined as starting a business from the ground up with nothing but personal savings and the proceeds from the first sale. It is one of the most effective and cost-effective methods for attracting positive cash flow. The positive cash flow is due to less borrowing, which reduces interest costs.
How do you bootstrap your business?
- Trade credits: Trade credits help in maximizing your financial resources for the short term. Trade credit occurs when suppliers extend credit to their regular customers for some agreed period, typically 90 days maximum, without charging any interest for new businesses. This might not be the deal if you are a startup because you will be operating on cash on delivery (COD) as your supplier checks your creditworthiness. However, you can negotiate for trade credits, and the only thing that you will have to present to your suppliers is a well-written financial plan.
- Factoring: This involves selling receivables to commercial finance companies to raise capital.
- Customers can also help you in writing a letter of credit.
Angel investors are high-net-worth individuals who receive an equity stake in exchange for funding. They expect to make a profit and typically have the business knowledge to share with you to help your company grow. Know that angel investors will scrutinize your business plan and that you will have to build a case for why they should invest, which is not necessarily a bad thing. Entrepreneurs should be vetted to ensure that their business plan is sound.
Drawing a business plan will involve the heavy task of preparing financial statements. However, this should not be a stumbling block to running your business. There are dedicated companies that will simplify your fund accounting or fund administration tasks.
Crowdfunding can be described as gaining popularity as a way of raising funds for startups. It is another best strategy because it does not require you to win over investors. Crowdfunding enables you to fund your business through various people who want to be part of your project/business. You will need to repay the loan or provide incentives for the people who have invested in your campaign. There are two types of crowdfunding:
- Debt crowdfunding: Also called peer-to-peer (P2P) lending as it combines the concept of crowdfunding and lending.
- Equity crowdfunding: This is where investors invest money in business in exchange for shares in your business. Investors receive ownership of your company.
If you want to retain the ownership of your business, then a credit card is the best and the easiest way of raising capital. Another great thing about credit cards is that they are flexible. You do not have to specify what you are going to spend the money on. The only problem with credit cards is that they come with a high cost of capital because their interest tends to be high.
The amount you will always obtain is based on your credit limit, which might be less than the one you would have obtained from the bank.
The government may provide grants to businesses that are involved in science or research. For example, the Small Business Administration (SBA) of the United States provides grants through the Small Business Innovation Research and Small Business Technology Transfer programs. Grantees must meet federal research and development objectives and have a high potential for commercialization.
Funding your business is a critical thing as it determines your business’ continuity. Unfortunately, most startups have not met their goals simply because they lacked the finances to run their business. For this reason, every budding business should look for various sources of money to smoothen their workflows and to achieve their goals.