How to fund your startup
Getting your startup off the ground is only half the battle. The next major hurdle will be working out how to fund the next stage of growth.
Many startups ponder the possibility of turning to crowdfunding, as this new-age style of funding becomes increasingly viable. Online crowdfunding – raising smaller amounts from multiple backers – makes it easy for entrepreneurs to test their product with a large audience. Changes to Federal Government laws has also made crowdfunding more viable and opened up new opportunities for entrepreneurs to fund their startups. But success is by no means guaranteed.
It worked for mobile payments and transportation network startup Ingogo, which raised $12 million in funding, $4.2 million of which came from equity crowdfunding platform VentureCrowd. It’s proof of what can be achieved via crowdfunding.
But if your crowdfunding venture isn’t successful, you’re probably going to head to your bank to see if you’re eligible for a credit facility or business overdraft.
If you’ve got a decent credit history, credit cards are an easy way to get access to borrowed funds. The other bonus is that credit card applications are processed a lot faster, and usually offer 30 days of free credit. Bear in mind that the lender will insist that the credit facility is in your personal name, not the name of your fledgling business.
The downside of a credit card if that you’ll be paying an interest rate of between 14 and 20 per cent, depending on the specials being offered by lenders at the time.
A business overdraft, on the other hand, can be handy because they offer a flexible source of short-term cash, which can be ideal for managing unexpected costs and fluctuating cash flows through that treacherous first year.
Bear in mind, though, that business overdrafts are not easy to come by. Your lender will want to see a rigorous business plan and budget, which can be expensive and time-intensive to prepare
Alternatively, you could opt for a personal loan or business loan.
A personal loan could be the right choice if you’re a sole trader, though if you’re set up as a company, a business loan could be a better option. When assessing your eligibility for either loan, the lender will consider your employment history, savings track record and earnings.
No matter how confident you are that your startup is the next big thing, don’t ever stake a house or car on your big idea, and don’t ever borrow more than you can afford to lose.