Cash flow is the blood stream of a business. Without it, your business will fail. For startups, it can be difficult or challenging to find startup capital. Reasons can range from a startup being risky to a simple lack of creditors or investors.
When starting, it is critical to understand the various avenues you can take to obtain startup capital. Each have their differences but offer various ways to raise the capital needed to grow and expand.
The most straightforward option is debt funding. Also referred to as general financing, this is when your startup takes on debt to help kickstart a product or begin operations. One of the biggest benefits are the terms being simple. You take out a loan, and repay that loan using a principal and interest amortization schedule.
However, should your business fail you will still be required to pay these funds back.
Next is the more popularized method of equity funding. While equity funding is a broad term, it can come in the form of a couple transactions.
If you have ever watched Shark Tank, then you know this methodology at a high level. A way to raise capital is offer ownership in your company. Depending on the attractiveness of your business and business plan, you can look for investors to trade ownership for capital. The benefit is you are not in debt in the traditional sense and likely do not have monthly payments associated.
Keep in mind though as your business grows, you have less ownership, which means less profit should you sell. Also, with an investor, they will want to see consistent growth or progress and that can add pressure.
Another type of equity funding includes mezzanine financing. While this is risky, it can be another source if you have exhausted all options. A mezzanine lender takes an approach of offering debt, with an ability to convert that debt into equity.
The creditor does this because it allows them to remain in line for compensation should your business fail. While you can get funding, it does come at a high cost in the form of equity and interest payments.
Other methods for raising capital include angel investing, using the SBA, and an IPO if your business can do so.
Lastly, you can look at revenue-based funding to raise the capital needed to expand. Also known as royalty financing, an investor will invest capital in your startup in turn for a percentage of earnings. This means if an investor wants 2% of revenues, for every €100 sold you would direct €2 to them.
This can work well so long as your startup can maintain healthy margins and sales. If your business has a tight margin of operations, a revenue-based model may not fit.
However, this funding option benefits both parties because the investors want to see revenue and sales grow. By having that interest, the investor may be more incentivized to offer their opinion, connections, or potentially more funding.
Funding your startup is unique and there are several different options. It largely depends on your growth projection, business model, and how much debt or ownership you are willing to give up. Either way, as we started, cash flow is essentia