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5 Ways Start-ups Can Avoid Giving Away Too Much Equity Too Soon

Wondering how to get start-up funding for your business without giving away too much equity? Luckily, selling equity is not the only option – there are many other ways that start-ups can access growth capital.

This article was contributed by our friends at Fundsquire.

Finding financing for your start-up can be challenging. Start-up founders often rely on friends and family, equity investors, or maybe even take out risky personal loans to fund their business growth. However, while these options are popular, they’re not always available to every SME. 

What’s more, giving up equity early on in a business journey usually means dilution and a smaller slice of the total pie in the future. 

Luckily, selling equity is not the only option – there are many other ways that start-ups can access growth capital.

Bootstrapping Your Business

It might surprise you to know that most start-ups (by far) are bootstrapped. Bootstrapping your start-up means starting a business with no outside investments. It entails growing your business with limited resources and relying on savings and limited internal finances to do so.

Keeping the business lean and growing organically is not going to see you blitzscaling, and you probably won’t be overtaking Uber any time soon, but holding onto equity and maintaining control can have many advantages in the long term. 

One way of bootstrapping your start-up is by selling your services. Outlining the monthly cash needs of your business is the first step, followed by plugging into demands for your talents to generate the needed cash. This could be anything from web development, copywriting, SEO, marketing, PPC to programming and even server admin work. It pays to think creatively and test the waters with different freelancing gigs. 

Investment From Friends and Family

One of the most prevalent forms of SME financing, finance from friends and family accounts for 38% of funds raised by start-ups. 

There are some potential risks to this type of funding,  including falling out with your lender if the business doesn’t achieve the growth they expected since they are not professional investors. Even though the lenders might be close to you, it’s common that uncertainties and friction can come up in the process when more details are “revealed” (i.e misplaced expectations). There are ways to manage this risk, mostly through clear communication, assessing how much prior-knowledge the lender has about investing, setting transparent expectations from the start, and engaging a lawyer, putting everything down on paper and explaining the risks in detail.

Rewards-based Crowdfunding

Rewards-based crowdfunding is where businesses or individuals can pitch to raise capital through small amounts from many participants in return of specific reward – usually the funded product – once it reaches its funding goal. 

It’s a good way to test market demand for a B2C product, especially if it’s visually demonstrable. The primary challenge? Creating a strong and convincing brand and product first. If you’re a good marketer and have a consumer-oriented product idea, rewards-based crowdfunding could be a good choice.

There are other types of crowdfunding as well, including equity-based crowdfunding (raising funds from several individual investors by selling securities like shares). Just keep in mind that this could entail giving away some form of equity. 

Debt Funding

Debt gets a bad wrap, but in many cases it’s a better and faster solution than selling more equity or facing stagnated growth while bootstrapping. It remains a low cost way of growing your business while also getting to keep it. There are several types of debt funding solutions you can look into. 

R&D Finance

R&D finance or R&D tax credit loans are an innovative debt funding solution that uses a company’s future tax credit payments as collateral for loans. For those who aren’t aware, tax credits can be received through the Australian Governments R&D Tax Incentive. Because the R&D Tax Incentive is a predictable source of cash for many Australian companies, but sometimes slow to materialise, lending against gives businesses immediate access to future funds. This funding option is best suited for businesses with high R&D expenditure. 

How this works: The lender estimates the size of the future return from the ATO and lends against that sum, and the loan is repaid through funds from ATO’s R&D Tax Incentive refund.

One of the biggest advantages of an R&D tax credit loan is that it’s available to small businesses that are pre-profit, and, in many cases, also pre-revenue. Of course, only those start-ups that are eligible for the R&D Tax Incentive are eligible for this funding option. 

Bank Loans

Companies at the earliest stage of their journey usually find it hard to convince a bank to step up and provide needed cash flow. Once the company starts to make some revenue, even if not showing profitability yet, banks do become interested. 

The main funding challenge for a new business is showing steady revenue growth and a well-thought-out business plan. Without collateral or revenue, a business bank can offer start-up business loans but the size of the potential funding is small.

Peer-to-Peer (P2P) Loans

Businesses today also have alternative lenders that offer secured and unsecured loans. P2P loans give lenders a way to choose who to invest in and to diversify their portfolio, and give businesses access to different kinds of investors and loans. P2P loans are a good fit for businesses looking for easy and quick loans without having to go to the bank or show an extensive track record. 

Invoice Discounting

For companies that have high implementation costs and long and/or seasonal timelines, invoice finance can be used as an easy cash advance, to help prep the business for investment, or to help a customer finance more production. 

The way it works is that a lender will offer a loan against an invoice that is to be paid at a set date. However, invoice finance may only be a good option once you are making sales and have a track record in generating revenue.

Government Funding

There is quite a big slice of government funding in Australia for innovation and regional development projects.

R&D tax credits through the R&D Tax Incentive are often the most easy and accessible form of government funding for start-ups, especially for those with a tech component. Companies can access up to 43.5% of what they’ve spent on eligible R&D activities as a repayment from the ATO after their yearly accounts are filed. You can either complete your R&D Tax Incentive application yourself or you can use an advisor to help.

There are several other government grants available to businesses. A good way to understand which type of grants are best suited to your business is by chatting with a grants consultant to make sure you’re maximising all the government funding options you’re eligible for.

Keen to Explore Your Start-up Finance Options?

No business or path to success and growth is the same. Fundsquire provides non-dilutive, frictionless growth capital to customers through R&D tax credit Loans, Revenue-Based Finance, Grant Advance, and other funding solutions months in advance for accelerated growth.

BlueRock creates effective strategies for businesses considering growth finance through grants, a capital raise, or revenue-based loans, and helps them access the funding they need. 

Fundsquire and BlueRock have partnered to empower businesses to get the capital they need, flexibly and quickly. If you have a question or are ready to apply for growth finance, feel free to reach out.

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