Welcome to the topic “How to Secure Capital for Startup Business“
In business, the term capital is used to describe the sum of all the financial assets of a company that are necessary to produce a good or a service. For a startup, this refers to the money that is raised and is used to pay the initial costs of running the business. The startup capital can be provided by multiple sources that include banks, angel investors, and other financial institutes.
There are a certain types of capital that are used by businesses, these include:
- Financial Capital
This refers to all types of funding that are raised by the company in order to generate wealth for its use.
- Human Capital
Human capital includes both the skills and the intellectual capital of the labor force. Skills and intelligence are vital for a business, as they help to develop newer business ideas and help in generating revenue for the company.
- Natural Capital
This refers to the natural resources that are being used by the startup to generate revenue, and to produce various goods and services.
The startup capital can be used to refer to the funding that is used to cover the initial costs of running a business. This capital can be used to furnish offices, renting or leasing workspace, stocking the inventory, and paying various bills. The operations of a startup are funded by this capital.
Types of startup capital
Startup capital can be divided into various subcategories, which include the following:
- Owner’s fund
In this form of capital the owner pays for the initial expenses of the company. This could be done by using personal savings to pay for the various costs that are vital for smooth operations of the startup.
- Crowd funding
This method of funding receives money from a large group of customers or potential customers, who are not compensated for the money they spent with equity or interest upon their payments. The crowd essentially pays for the product or the service the startup is looking towards launching.
- Business loan
There are a variety of loans that are available for business, at various interest rates, for them to manage their everyday costs and expenditures. There are specific loans available for startups.
- Venture capital
In this form of startup capital, an angel investor invests in the company for a percentage of the equity or a percentage of the overall profits of the company.
How does a business use its capital
A common trend, seen across various businesses is the use of capital. Most of the companies use their capital as a source to branch out and grow their existing brand. Capital provides a company with the assets that are crucial for various tasks including growing the business.
When a company expands, it needs newer technology, additional employees, and in most cases a new office. Capital provides a mean to achieve these goals. To further illustrate the use of capital by companies, it is important to mention a few ways in which the company might use its capital.
- Equipment
When a company has to increase the production of a product, there needs to be an expansion in the technology and equipment that is currently being used.
- New employees
When a company increases its production, it needs to hire more employees. The salaries of these employees are paid through the capital.
- Enter a new market
A company can realize the potential customers in another market, it could decide to go on and start selling its product and services in that market. To move into that market, the company needs to either open a new branch or establish new trade routes with the existing branches.
- Buying another company
Sometimes, the only way for a company to grow is to acquire another company. This can be a direct competitor in the same market or an entirely different product oriented company that diversifies the portfolio of the initial company. In order to achieve this, the company relies on capital.
Advantages and disadvantages of startup capital
Before pursuing the funding for a startup, it is crucial that all of the advantages and disadvantages are taken into account. After considering these, it becomes fairly easy to understand which route will be most fruitful for the startup. These advantages and disadvantages are specifically for venture capital.
Among the advantages of venture capital is that a large sum of money can be raised by the company. This will help to manage various tasks of the company including expenditures for maintenance and growth. There are no monthly payments for the amount of money that has been raised. The investor will provide the money for a percentage of the company’s equity. Another advantage of venture capital is that there is no need for the owner of the company to pledge their personal assets.
There is professional, industry-standard help available to further grow the company and to raise rounds of investment in the future. There is an increase in publicity and exposure, which will be crucial for the future growth of the company.
After considering the advantages of venture capital, we now move on to some of the disadvantages that are associated with venture capital. One of the biggest disadvantages that are associated with venture capital is that the stake of the owner in the company is reduced. As more and more of the equity is liquidated to raise future round of investment, the smaller the stake of the owner remains in the company. The overall cost of financing is unbearable for many. Secondly, the investment is scarce and is relatively difficult to obtain.
Another disadvantage, associated with venture capital is that funds are released on performance based schedule. The capital firm determines a set of goals, which must be achieved in order for the future release of the capital. The business and the owner are put under immense stress and pressure, as their business is expected to grow rapidly after capital is released.
Sources of financing capital
There are multiple resources available for securing capital for a startup business. Startups can use these options to finance their capital and to grow their business. Among these source for startup capital are:
Commercial loans
Commercial loans are a reliable source of getting startup capital. These commercial loans are further divided into various categories:
Bank loans
A bank loan is a type of commercial loan that can either be for a short period or a long term. A person can get the money they need from the bank by providing a thing of value such as property to the bank.
Cash credits
This is offered by the bank in place of any tangible item, which serves as a security deposit against the loan that is provided by the bank.
Venture capital
Venture capital is the form of investment, where a large sum of money can be raised against a percentage of the equity of a company. The investor either gets a percentage of the equity of the company owned by the owner or a percentage of the profit that is being made by the company.
This form of capital mostly favors technology based startups, which are working on a large scale. This also includes companies that have a mass appeal, along with a chance of growing the company quickly.
Trade credit
This offers a short term solution that provides a flexible and a convenient method for financing goals of a company. There must be a good reputation in the market in order to be able to receive this method of funding.
Installment credit
This refers to the form of financing in which the asset is acquired, but the payment is made later on installment basis. This is the most common practice of business owners.
Things to consider before choosing the funding type
There are certain things that are important and must be considered before choosing the funding type. These will help to better understand the type and amount of funding that you should be looking out for.
- Determining the amount
It is important to have an estimate of the amount that would be enough to be able to manage the expenses of the company. It is important to choose the right medium for getting these loans, as it will serve the company in the long run.
- Choosing the right option
From the multiple options, which are available it is important that you make the best decision according to the need of the company. If you are able to use your own saving or investment, it is better to start with bootstrapping as you will not be giving up any percentage of the equity of the company you own.
If the company is a technology-based company, with room to grow and enter multiple markets, you can go for venture capital. In venture capital, the stake of the owner gets reduced as more and more of the equity is liquidated to raise future rounds of investment. Thus, it is important to choose the type that best suits your needs.
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