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7 Innovative Ways to Finance a Startup Business

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The editors at MBA in Finance Degrees decided to research the topic of:

The 7 Innovative Ways to Finance a Startup Business


- Entrepreneurs spend an average of $70,000 to start a business
- business survival rates
- about 30% of all new businesses fail within the first two years
- about half do not survive five years
- 69% survive 2 years
- 44% survive 4 years
- 49% survive 5 years
- 31% survive 7 years
- In the US, small businesses
- generate $7.8 trillion in revenue
- employ 42.7 million people
- comprise 98.2% of all firms in the US
- 46% of startup failures are caused by incompetence and lack of funding
- bad planning and organization
- startup capital accumulated for small businesses adds up to approximately $80,000 a year, per business
- In 2012, 514,000 new business owners launched companies

Bootstrapping - your assets


- using whatever resources you have on hand to help you get your business to the next level.
- Where do entrepreneurs find the money?
- personal savings
- home-equity loans
- credit cards
- operate on a shoestring budget

Grants


- Government grants
- 11 federal agencies give out funding every year to small business startups
- local councils, state grants
- Small Business Innovation Research Grants (SBIR) and Small Business Technology Transfer Grants (SBTT)
- Phase 1 grants are meant to support market research in the early stages of the startup business.
- Phase 2 grants require a well-developed business plan
- Business plan must depict how your research will culminate into a salable product
- Can be difficult, but the grant money is big if you can get it.
- Grants are not required to be paid back
- Risks:
- accountability is higher
- might have to work within a difficult deadline, to show your progress.
- If you do not achieve the progress you indicated in your proposal, there may be some sort of penalty.

Friends and family


- Borrow love/blood money from your family and friends
- risks
- Meddling lenders
- use their "generosity" as leverage
- ruined friendships.
- advantages
- Interest rates are generally much lower than those offered by banks
- lenient repayment terms
- show of financial and emotional support

Angel investors


- private, high net-worth individuals who invest in businesses with potential for growth
- provide expertise and useful contacts
- can ask for 10-50% stake in the business
- On average, invest from $50,000 to $2 million in companies
- angel investment and venture capital make up only 6% of funding
- Slow process
- Ways to meet angels
- angel clubs
- Open Angel Forum
- AngelList

customers and suppliers


- customers may be willing to help fund your product development if you offer
- customization
- discounted pricing
- a pay-for-performance contract.
- may influence another investor to help if they see customers' support
- material suppliers
- they may hold inventory for you if you guarantee you'll pay back by a certain date
- Ex: A hairdresser with a loyal clientele asks clients to invest in her new salon
- She offers free haircuts in return

Social lending/peer-to-peer


- individuals apply for loans from other individuals.
- two parties set their terms and a web site acts as the intermediary.
- All loans are three-year unsecured loans
- amount is deposited directly into your bank account when loan is approved
- fixed monthly payments are automatically deducted from your bank account for the life of the loan
- Prosper.com
- post a fixed loan request
- Interested lenders then bid on your loan.
- LendingClub.com

Crowdfunding


- large number of people invest a small amount of money in a project.
- approximately 600 crowdfunding platforms throughout the world
- expected to reach $5.1
- more than half of the 2.7 billion raised in 2012 came from North America
- artists, musicians and the like display their talents and may earn support.
- doesn't give away equity, and no loans to repay
- soon will include the ability for non-professional investors to make small equity investments


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