The funds invested to start or develop a business are referred to as start up finance. Ideas that are formulated do not just grow into a business or a project; so many factors contribute to seeing this vision materialize into something substantial.
One important factor is funding. Money is a necessity in business, especially startups and every entrepreneur hope to get the capital needed to start and grow their businesses.
In as much as there are benefits in getting funds for your startup, most especially the joy and satisfaction that comes from having the capital for your business, there are also cons to startup funding. This article will examine the facts of startup finance that can affect your business.
Downsides To Startup Funding
Everyone knows and understands the importance and advantages of startup funding. However, very few realize that there are disadvantages to it and therefore, just diving into applying for startup finance, without carefully and wisely weighing the options, can bring problems further down the line.
The struggle to get funds for a startup business is real, especially from banks. The application process for loans is most times long and tedious. Additionally, banks rarely give loans to startup entrepreneurs because most of them do not meet the stringent requirements and because most startups do not last more than a few years.
The time that is spent looking for funds, could be spent on brainstorming and building your customer base, as well as, understanding the market and the needs of your target audience. Sadly, even with so much time and effort spent on getting funds, some of them are futile, especially in getting bank loans.
Due to the fact that monthly interest rates on the loans taken have to be paid, funding restricts the in-flow of cash into your business. Payment of loans is considered expenditure, as money leaves the business to the hands of your lenders. The failure to pay your loan would definitely cause damage to your business, as well as your personal credit which would make getting future loans difficult. Furthermore, it is very challenging to combine loan payments with the numerous business bills like payment of salaries, rents, utilities, inventory etc.
Because of the above, startup entrepreneurs have always been advised to carefully select loans and payment plans that would not run their business down before it even kicks off. Additionally, it is advisable that loans gotten should be used on developmental projects like getting a bigger workspace, a piece of equipment that would enhance effectiveness and productivity, instead of on payment of salaries.
Does Not Encourage Bootstrapping
Bootstrapping is simply starting a business without external involvement and limited funds. There have been opinions that bootstrapping can be said to be one of the best and cheapest means when raising capital for a business. When there is limited capital for your business, you are more prudent and go for things that matter. It also tests your ability to think outside the box and develop creative ideas on how to make do with the limited funds available.
However, if you get funding from the loans applied for or from investors, the tendency of getting carried away cannot be overruled. It is in situations like this that new entrepreneurs use the money gotten to purchase unnecessary equipment or start producing new products on a whim without thorough investigation and consideration on the probability of the success or failure of the product. It is pertinent to note that getting funding does not guarantee a successful business, so many factors contribute to the growth of a business. Also, rich pockets could be both a blessing and a curse, depending on how the money is managed.
Allows for External Control
When your business gets funded by an investor, who could be an individual, a group of people or an organization that provides the capital for the business be prepared for external control. It is because, in exchange for the funds given, these investors gain a certain control over your business and are also part of the decision making process. You would constantly have an investor boss sniffing around your business, wanting to know your every move.
In addition to the money they provide, they also bring their expertise and professionalism to the table, which could either make or mar your business. While, on one hand, their experience in business is an advantage, but on the other hand, you are the one with the vision and no one can understand the projections for your business more than you. Additionally, in order to earn the money invested into the business and more, investors might put so much pressure on you that would be detrimental to the growth of the business.
Investors are in the business to make their money back and basically do anything to achieve that aim. They have high expectations about the profit of the business, therefore put so much pressure on the business owner and the development of the business. Unlike, you who are in business for the profit as well as the bigger picture which you had envisaged before starting the picture, the investors may only be concerned about the returns from the business.
Inevitably, tension and conflicts might arise as decision making would be based on different objectives, while you are concentrated on the growth on your business, and are ready to forgo present pleasures if it would help in your long-term goal, the investor’s primary aim is present-day profit and could care less about future growth.
It Adds to Your Uncertainties
Starting a business is already a huge risk, no matter how calculated you are or how sure you are of your skills as an entrepreneur or the quality of your goods and services. Nobody is entirely sure of the future outcome of his/her business, therefore uncertainties and questions cannot be ruled out from the minds of entrepreneurs especially growing ones. Getting financial aids adds to your doubts and thoughts, as you have debts and interests to think of.
In conclusion, the importance of funding for startup businesses cannot be overemphasized, nevertheless, contrary to the perception of entrepreneurs getting funds is not a do or die affair. As stated above it doesn’t equate success in the business, other factors also determine this. Therefore, if you can start a business on your own without taking loans or looking for investors, please do. You can fall back on fundings if you are left with no options, or there is virtually no other way to generate capital.