Most financial institutions don’t work with early-stage startups, which is why founders are turning to angel investors and venture capitalists for funding. Today, fewer deals and larger raises make early-stage financing more elusive than ever.
How can you bridge that gap? How can you produce your first products and hire your first employees? Below are a few best practices that can help startups secure financing, circumvent funding bias and overcome a lack of personal financing.
Pricing And Purchasing Structure
Using a subscription model allows businesses to charge up front for increased access to a product or service. By employing a subscription model, you can require customers to pay up front, and then use the sales to finance the creation of a new product or service, while able to cover your initial costs. Subscription models usually range from monthly to quarterly to biannually and annually. By taking preorders and accepting deposits, you are eliminating your risk by having customers pay up front and are also able to prove demand. This is helpful when seeking to bridge an initial funding gap or when you are seeking to raise equity financing.
Trade and barter
If your initial products or services require funding to establish and grow your company, then this method might be for you. If you are a nonprofit, many times trading and bartering can come in the form of in-kind donations. If you are a for-profit, sometimes it is easier to get $30,000 worth of items or services you need, compared to raising $30,000 in cash. Negotiate and be flexible in how you achieve outcomes. Look for ways to promote resource providers and the services they offer in exchange for discounts.
Search for the opportunity to create mutual value through sponsorships. As an example, many brands are incentivized to associate with a social cause. When engaging with these companies, it may be cheaper to host sponsored events and create sponsored materials, as opposed to spending cash on resources.
For example, if you are seeking to raise $30,000 for a web-based application, work with a local coding school to supplement the workload and trim down your cost on the project. Or, if you need $10,000 to purchase initial equipment and infrastructure, first reach out to any larger organizations that may be able to donate old or recently replaced equipment. Think about spaces you can rent, borrow or share, and propose temporary profit-sharing agreements that allow you to pay individuals at a later time.
Purchase Order Financing (Debt)
Leveraging contracts, memorandums of understanding (MOUs) and purchase orders can enable you to access debt financing at a cheaper rate.
For example, if you have a current contract with the government to build 300 units and need money to manufacture the initial inventory, you can share your purchase order with the financier to access debt financing at low rates.
This might be a fit for your startup if you are able to secure purchase orders or legally binding agreements to pay for products or services rendered — and require money to deliver the product or service to the customer.
Accelerator Programs And Fellowships
Accelerator programs and fellowships support entrepreneurs in growing their businesses and increase the likelihood of success. Many times, these programs come with a form of mentorship and access to capital.
A couple of the top nationally recognized programs include Y Combinator and TechStars, which generally invest for a small percentage of equity. Additional opportunities include pitch competitions, which can be phenomenal sources of free money.
By Damilola Faustino