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The different Ways of financing your Startup

Even the most creative startup needs money to become successful. It is this simple truth that leads to entrepreneurs searching for better ways to finance your startup. The days when getting a loan from a bank was the only way to start a business are long gone. Financing your startup has become a matter of choosing the right way and valuing its pros and cons against the other options.

A lot can depend on this choice. That’s why we are going to take an in-depth look at all the ways you can fund your startup.

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The Bank Loan

To set the stage, we are starting with the classic. Just because it is the traditional way to finance a startup, it is not a bad way. A bank will give you an amount of money that is connected to a detailed repayment and interest plan. A usual loan runs for about 5 years in which you have to repay the money plus interest. To support startups, some banks are offering five year loans with the first two exempt from payment. This allows startups to minimise financial strain in the difficult starting phase.

Since the bank wants its money back, it has to be convinced you will repay the full amount plus interest. To guarantee this, most banks will require a fully fleshed out business plan, including a detailed financial plan for the first 3 years. This enables them to evaluate the economic feasibility of your business model.

Small or very big loans are somewhat problematic. Because there is fixed cost on the site of the bank, small loans offer little profit and will rarely be granted. Since there is always the danger of repayment failure, big loans are very risky for the lender.

Venture Capital

The glamorous side of startup financing. An investor buys shares of the company, with the value depending on the overall potential of the company. It is not unusual that investors help the startup they invested in some capacity or other.

Naturally, these investors will require convincing before they spend a lot of money on you. To make this process easier for both you and your investor, you should create a pitch deck. Using a business model canvas as a presentation tool to give a general overview will help you convey your idea in a clear and elegant way. Additionally, you should have a business plan in reserve, in case of in-depth questions.

The biggest advantage venture capital offers are the potential amount of investment you might acquire. This will not only give you a lot of money to build your business, but will also make for great marketing and possibly attract additional investors.

Bootstrapping

The sustainable choice when financing a startup. Bootstrapping means you build your business with equity alone. Since most startup founders don’t have huge amounts of equity, this also means that you will likely spend a big chunk of your revenue on the growth and advancement of your company. Scarcity is the mother of efficiency. Entrepreneurs with little money to invest, will think long and hard if it is the best way to further their business.

The bootstrapping model is especially suited for those founders, who subscribe to the lean startup. Since building your minimum valuable product, presenting it to a first customer base and then iterating it, will cost you time more than it will cost you actual money bootstrapping will reduce the outside pressure you face when employing other ways of financing. This independence will most likely lead to a superior product and a more satisfied entrepreneur.

Although it sounds counterintuitive at first, there is such a thing as harmful startup growth. VC startups in particular are in danger of biting more than they can chew. Expanding into every market there is, just because you have the money to do so, will rarely lead to sustainable success. As a bootstrapping entrepreneur, you will not face this issue. Every investment you make will be based on precise information and strategic planning.

Crowdfunding

The youngster of the four kinds of financing. With the rise of the social web, so did the concept of crowdfunding. At its core you present your product or your idea to an Internet crowd and they can invest, usually small amounts, of money into it. This can be rewarded with gifts, early or preferred access to the product.

There are several big crowdfunding sites that supply you with an infrastructure to get your project out there. They also make sure, that all actions regarding your campaign are legal and covered by their terms and conditions. So the risk of getting scammed is rather low.

A successful crowdfunding campaign is based on excellent marketing. As in the lean startup, you should start with a minimum valuable, a prototype, and present that to your audience. It will help potential investors understand the product and might help them with their decision. Now you can keep your crowd informed about new features and updates. It will create curiosity in your customers and will urge them to check back regularly.

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