A startup refers to companies or businesses in their infant stages of operation. One or more entrepreneurs can create a startup in a joint agreement. Thousands of startups are started worldwide every day, but a few make it to the established business stage due to financial constraints.
There are plenty of financing ideas for your startup. However, each option is differently affected by different economic situations and has varying costs and risks. Ensure you scrutinize your preferred financing idea critically for the startup’s success. You can engage an experienced financial planner to guide you through the evaluation process.
Here are several reliable ideas for financing startups:
Scientific Research & Experimental Development (SR&ED)
Scientific Research & Experimental Development (SR&ED) is a Canadian tax relief program that offers financial support and tax credits to businesses based on scientific research and experimental development.
The program is a perfect way of financing scientific startups in Canada as they enjoy plenty of tax reliefs, rewards, and total funding for their operations. Any science-based businesses under the stipulated category, including primary research, applied research, support research, and experimental research, can benefit from SRED funding.
SR&ED aims to encourage entrepreneurs to undertake science-related business ideas that everyone else might be unwilling to adopt due to high startup capital. The program has existed for years in Canada, benefitting plenty of established and young businesses.
Personal Financing
Personal financing is the best way to fund a startup, as it has been proven effective by several entrepreneurs. It involves funds acquired from selling valuable items, savings, or profits from other operations into a startup to be paid back through more profits and prestige. Equity from real estate or mortgages is also a form of personal financing for startups.
Personal funding lets you entirely control the business, saving you plenty of time that would otherwise be used in partnership meetings and possible disagreements. Again, you can adequately plan your finances depending on your business needs and account for any losses or misfortunes encountered.
However, you should carefully evaluate the strength of your funds to ensure you don’t send your family into a frustrating situation.
Loans from Banks and Other Financial Institutions
Getting loans from banks and other financial institutions is the most ordinary way of financing startups. Although the idea works mainly for established businesses, your startup might be among the lucky ones to benefit from bank loans.
The funding method requires entrepreneurs to apply for loans from the financial institution, which then sends professionals to evaluate the startup idea, the entrepreneur’s economic foundation, and other prevailing financing options.
Suppose a startup is approved for a loan. In that case, the entrepreneur agrees with the bank stating the percentage of interest, duration or repayment, payback installments, and possible consequences in case of loan default or breach of contract. Although it has been effective for many businesses, the entrepreneur’s assets remain at risk, and they miss full ownership of their startups.
Support from Friends and Relatives
Another great way to finance business ideas is by acquiring support from close friends and relatives. Borrowing from friends (sometimes referred to as FFF for Friends, Family, and Fools!) requires assembling a group of willing members, explaining your startup idea to them, and drafting how much you might need from them.
Most friends and family members do not request paybacks or interest on their ‘loans,’ but if anyone does, you should strive to adhere to their request. You shouldn’t rush to the bank and other financial institutions without trying those around you.
Other Government Financing Options
The government has plenty of financing opportunities for startups besides Scientific Research & Experimental Development. An excellent example of government financing options is grants available for entrepreneurs in the sectors the government seeks to improve.
The procedure for acquiring government grants is relatively strict to ensure every legal business gets a rightful share. You might require working with a government agency through the application process or investing in grant-favoured startup ideas.
Venture Capital
Venture capital is when an investor finances a startup to acquire equity and shares from the business. It’s a good way of financing startups as the investors take up a significant part of the starting capital and other operational costs.
Some common institutions that offer venture capital to startups include financial institutions, traditional banks, privileged investors, and investment banks. However, with venture capital, the entrepreneurs may not have complete control and ownership of the business. Additionally, some venture capitalists may be over-demanding during the approval and allocation of funds.
Crowdfunding for Startups
Crowdfunding happens when a potential entrepreneur assembles a group of willing people to raise finances for the upcoming startup. It doesn’t have to be close friends or relatives. You can welcome anyone to your crowdfunding program, including colleagues, former schoolmates, and current churchmates.
Nowadays, most entrepreneurs organize crowdfunding mainly through WhatsApp group chats, where the administrator welcomes several participants and clearly explains the startup idea under discussion. However, crowdfunding may take a long time to prepare the participants, and the success rates are sometimes low.