Have you brainstormed startup funding ideas to help you launch your company sooner rather than later?
Where do you get enough cash to start up your own business?
In today’s 2 Minute Accountant episode you will discover a few funding essentials to help you choose the best option for your business.
Let’s take a look at them.
There are many different startup funding opportunities out there including seed funding, debt funding, borrowing money from the bank or raising the money yourself.
How do you know which funding option is the best for you?
The secret is starting with a proper business plan. A good plan will always help you start your business right.
Tip: Make sure you have enough cash flow to fund your business startup through to the end.
Make sure you have enough cash flow to fund your business startup through to the end.
Once you’ve sorted all these details out, it’s time to think about raising some cash.
Most of the time, the money for starting up your business comes either from you, your family or a friend. If you are borrowing from family or a friend, it’s always best to put some legal documents together. At the end of the day, these are the people supporting you and your business from the very beginning.
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Debt funding VS getting a bank loan
Debt funding means borrowing money to either start or grow your business. It’s pretty hard to get it unless you have some physical assets to back it up.
But debt funding is a lot cheaper than borrowing money from shareholders or getting new shareholders.
Borrowing money from the bank is pretty straightforward. You go to the bank and tell them how much money you need. After dealing with the paperwork involved you can have your money.
Which startup funding option is better for your startup?
Let’s take a look at this example. If you have $1 and you put it in a bank, the bank will probably give you somewhere in between 0 and 1% interest. But if you put that $1 in your business you will probably get about 15% return.
On the other hand, if you go to the bank, you could probably borrow money for a business line for about 7-8%.
So let’s say your business needs $100k. You go to the bank and they charge you 7%. If you go and look for investors to put $100k into the business, they’re probably going to get a return of say 15%.
The bottom line is this: Borrow money from the bank at 7% VS get money from your investors at 15%.
I know what you must be thinking, “Well, Andrew, I don’t have to repay my shareholders.”
No, you don’t have to repay them, because they’re taking a risk on you. If you lose their money, they’ve lost their money. But if you lose the bank’s money, they’re going to come after you.
You might also be interested in: 5 Precise Things You Should Know About Your Business
The difference between the debt funding VS bank loan…
Sometimes it’s hard to get money from shareholders because of all the rules and restrictions in the Corporations Act. I know most of the time it’s easier to just get a loan from the bank.
But before you make any final decisions, here are a few things to think about:
- What are the implications for each funding option?
- How is your emotional attachment to your friends and family going to influence your relationship if the worst case scenario happens, and you lose their cash?
- How much of your business can you keep for yourself with each funding alternative?
Find the perfect startup funding option for you!
I can assist you in making the right decisions when it comes to your business. Whether you have questions about business funding, a company set up, business structure or registration, I am here to help you. Let’s get in touch now.