Many entrepreneurs opt to start digital business due to the relatively low overheads and startup costs when compared to physical product companies. Without the added costs of stock, storage, and fulfillment, digital products seem to require less up-front finance to get a business off the ground.
What owners often forget to factor in is that their competitors also have the same advantage. When all else is equal, it's the company with the budget for iterative development, thorough research, and extensive marketing that will win the lion's share of the market.
If your business is going to be successful, therefore, you're going to need to ensure a good source of funding. Let's take a look at the various options for funding your business.
A viable option for many is to borrow money from a bank in the form of a private business loan. These loans give you immediate access to large amounts of cash, with fixed monthly payments and interest rates.
However, remember that with a bank loan you take one hundred percent of the risk. If you are forced to default on your repayment responsibilities you could find yourself in very serious financial trouble. Personal and business loans should not be taken lightly - think carefully if this is the right option for you.
Angel investment is one of the most desirable sources of funding for a budding business owner.
So-called business 'angels' are affluent individuals with access to large amounts of investment capital. If your business piques the interest of an angel investor, you may be able to secure large amounts of funding in exchange for equity or convertible debt.
One major advantage for entrepreneurs in this scenario is that, if your company is incorporated, the investor takes on the financial risk in the form of company shares. If your business fails, the angel loses their money, but as part-shareholder of the company you won't have to pay the investment back (provided you fulfilled the responsibilities outlined in your shareholder agreement).
However, competition for the attention of private investors can be high; you'll have to prove your business is profitable and has a bright future ahead of it.
Venture capital investment
Venture capital (or VC) funding is often confused with, though quite different from angel investment. Whereas angel investment comes from a private individual, venture capital is provided by businesses that use other people's money to finance your project.
It works like this; venture capital firms first set up a fund for a group of private investors. The firm then seeks out opportunities on behalf of its clients, hoping to secure profitable equity investment using the capital it has in the fund. Any profits are paid back to stakeholders according to the fund agreement.
Due to the number of involved stakeholders, venture capital can be quite complex to secure. There is often a lengthy assessment process, and many firms will require that you set up a board of directors, some of whom will be hand-picked by the firm itself.
VC funding is generally better for businesses that require large amounts of financial backing, as well as the expertise of highly experienced individuals. If your business model supports a design by committee approach,
Whilst crowdfunding itself is nothing new, the popularity of sites like Kickstarter and GoFundMe have opened up new possibilities for businesses of all sizes.
allowing individuals to pay for a product before it's even been produced. If your product has the potential to capture the imagination of your market, crowdfunding could be a great way to secure the funding you need to get it off the ground.
However, don't make the mistake of thinking that a successful crowdfunding launch is easy. Marketing your Kickstarter is a very fine art, and even if you are successful, you'll still have the responsibility of delivering on your promises.
Without their approval and support, your product just isn't viable.
Thriving small businesses are great for the economy, and the government will do what it can to help entrepreneurs be successful. There are a number of government support options available including grants, loans, and consultancy services. Make sure you take a look at https://www.gov.uk/business-finance-support-finder to see if there are any options that could work for you.
So that's the five most common options for financing your business. Don't forget that whichever you choose, you're like to need a compelling pitch deck to help you persuade investors and secure finance. Check out our blog session soon and you will find great advice on how to build a great pitch deck.
Feel free to drop us a line if you have any question. Good luck!