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If you have started a new business or are in the early stages of your venture, you may come across the term ‘startup capital’. Startup capital refers to the amount of money you need to get your business idea into a fully functioning business.
Navigating and sourcing startup capital is essential for an early-stage business. This article will explain some key considerations to keep in mind as you start your business.
What is Startup Capital?
Startup capital (sometimes called seed capital) is the amount of money you need to get your business going. It will cover necessary expenses from the early stages, such as:
- office space;
- bills and utilities;
- employees;
- equipment and supplies;
- licences;
- manufacturing costs; and
- stocking inventory.
Depending on the type of business you are running, you will have different startup capital requirements.
How Startup Capital Works
Your startup capital can come from you or a separate investment source. Usually, it is a mix of both. There are lots of different types of funding sources, including:
- venture capital funds;
- angel investors;
- crowdfunding;
- grants; and
- bank loans.
Venture Capital
Venture capital is a popular way of raising funds. It involves securing funding from venture capitalists. Venture capitalists are usually institutional investors, such as high-net-worth individuals, banks, or limited venture capital companies. Typically, venture capitalists look for companies with high potential for future growth. If you have not started your business yet, they will be looking at the potential of your business idea and strategy.
Thus, it is worth considering both the positives and negatives of securing startup capital from a venture capital fund.
Angel Investors
Angel investors are somewhat similar to venture capitalists. Typically, an angel investor is a high-net-worth individual interested in a specific industry, but an angel investor can also be a collection of individuals. These investors seek to give you their funds and their expertise within that industry. In return, they will ask for an equity stake in your company.
As a result, whichever is preferable for your business depends on your exact situation and your overall strategy.
Capital raising is a critical time for any startup. Take control of your startup’s equity with this free cap table template.
Crowdfunding
Crowdfunding is an increasingly popular type of funding. It involves getting many donors to pool into a collective fund. Each donor puts in a relatively small amount, but the fund can sometimes be significant because there are many donors. In addition, investors can sometimes also be potential consumers. As a result, crowdfunding is a good way of increasing your brand exposure.
Grants
You may qualify for government grants to cover your startup costs as a small business. Some of these grants could come from tax incentives; however, others will have an application process. This type of startup funding is usually more likely to cover your startup capital expenses than set you up for the long term.
Bank Loans
Finally, you can always revert to a bank loan. With historically low interest rates over 2021 and 2022 so far, a bank loan is a good way of getting cheap debt to fund your early expenditures. It is always a good idea to look around for the best loan rates that you can find, as sometimes, you can get a better deal than your own bank provides you.
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Key Takeaways
If you are running a business in its early stages, you may want to secure some startup funding. Taking on debt rather than using your own company funds is a good way of keeping liquidity in your business. This is especially the case if you can find cheap debt, raise high amounts of funding, or get some expertise alongside your funding.
As a result, you should ensure that you are familiar with all of the different ways of securing startup capital. Angel investors, for example, can provide you with industry-specific expertise as you embark on your business.
Alternatively, securing crowdfunding can be a good alternative if you can develop a good marketing strategy. In any case, you will usually be able to revert to a bank loan (provided you have a good credit score), which will help you get through the costs in the early stages of your business.
If you need help with startup capital, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Angel investors are investors who focus on a particular industry and have good expertise that they can provide your business.
A venture capital fund invests in high growth potential early-stage companies, where they will give you lots of funding for an equity stake in your company.
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