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Generating funding for a new startup is one of the first major tasks involved in bringing a business idea to life. Raising capital can be a highly competitive process. Therefore, it is essential to thoroughly research and understand which financing options are most suited to your business plans. This article will explain five tips for generating finance for a startup business.
1. Decide How Much You Need to Raise
The first step is to decide precisely how much you need to raise and how long the funds must last. You must have a general estimate to source funding. Ensure you remain realistic when assessing this. Accordingly, try not to underestimate or overestimate your goal.
2. Understand What You Want
It is essential to know precisely what financing suits your business plan. This means you need to understand the different funding forms available to you.
The following table briefly outlines various financing options typically available to startups.
| Form of Financing | Explanation |
| Friends and Family | The first port of call for aspiring founders is often their friends and family. If you seek money from your friends and family, ensure all parties understand the agreement and the risks associated with their investment. |
| Debt Financing | Debt financing involves taking out loans to fund a business venture. Creditors typically expect you to repay the money in a fixed timeframe with added interest. Types of debt financing include: + business loans; + personal bank loans; and + debt-based crowdfunding. |
| Equity Financing | Equity financing involves giving a portion of ownership in your company to funders in exchange for capital. Types of equity financing include: + venture capital; + angel investors; and + equity-based crowdfunding. Equity-based funders will likely expect your business to become profitable quickly and have high growth potential. This way, they will likely receive a good investment return. Consider whether this is feasible for your business. |
| Business Grants | The UK Government backs many different schemes that provide grants to new businesses. You would not need to repay a grant. However, business owners must meet strict requirements to be eligible for a grant, and grantees must spend the money to achieve a specific purpose. |
| Crowdfunding | Crowdfunding involves generating a pot of funding from many contributors. The contributors tend to give small amounts either as a donation (donation-based crowdfunding) or in exchange for rewards (rewards-based crowdfunding). |
You should research different funding sources and find which best suits your business’s needs. Consider the following:
- your business plan;
- the amount of money you require;
- the purpose of the funding;
- the time frame you need the funding to cover; and
- your business’s realistic growth potential.
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3. Prepare to Seek Funding
Once you decide on the most suitable funding options, prepare to seek funding. This preparation will involve:
- researching specific funding sources;
- finding the right investors whose expectations align with your goals;
- finding a loan you could be eligible for; or
- expanding your network and pitching to potential investors.
4. Seek Professional Advice
While raising capital, as well as the legal documents you will need to put the financing in place, there will be various other areas of law that will be relevant to ensuring your business is ready for investment. These can include:
- contract law;
- employment law; and
- intellectual property law.
An experienced lawyer can help you understand legal requirements and navigate the legal landscape. Furthermore, they can help you conduct due diligence on your own business to identify gaps and put them right before inviting an investor or funder to look into your company. A lawyer can also advise on and mitigate potential risks associated with different funding options, investment structures, and partnership agreements. Such advice can better your chances of long-term success.
Business consultants and financial advisors are among the other professional advisors that could prove helpful during this time.
5. Be Patient
Many people will seek funding for a new and inventive business idea on any given day. Generating funds can be a highly competitive and often lengthy process. Try not to be discouraged when facing rejection. The path of a founder is rarely linear. Remain persistent and reevaluate your pitch and plans when necessary.
Key Takeaways
Ultimately, generating sufficient capital can be a challenging task for aspiring founders. Planning and preparing for this process as well as you can will pay off in the long run. This article discusses five tips entrepreneurs should know before raising capital for their startup businesses. These are as follows:
- determine exactly how much you need to raise;
- understand the various options available;
- prepare yourself and your business plans for funding rounds;
- seek professional advice; and
- be patient and persistent.
If you need legal advice about financing your startup, 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.
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