When it comes to starting up a new business, most entrepreneurs begin by having a great idea that they believe will work. They then launch this idea because they want to do something they love or because they are looking for financial freedom. However, between having a great idea and kick-starting a business there are a number of things to consider. One of the important factors to consider is financing. Financing is required for starting a business as well as for growing it.Entrepreneurs usually start their business through personal funding. The founder may use his own personal finances in the beginning. He may also be successful in getting friends and/or family to help him start. These friends or family members will usually loan money to the entrepreneur because they believe in him/her even though the product or service has not been offered yet. This source of funding usually may suffice at the beginning but will not help the startup grow exponentially.

As the new startup grows, products or services are sold and revenue is generated. However, the more sales are generated, the more expenses that may be incurred to cater for the growth in demand. It is at this time where many startups would opt to bootstrap. Bootstrapping in this sense means using the company’s own generated cash to finance the business. While this is a good option to keep expanding the business, it does not take into consideration the nature of the market or product. Should the market be a fast growing one, then bootstrapping will never get the startup to grow in line with it. It will however keep the control of the company with the founders without getting them into any debt commitments. Other options that may be available to entrepreneurs looking to invest and expand their business include approaching financing institutions for loans or gov-ernments agencies for grants. Debt financing provides a faster method of obtaining cash without losing ownership of the company. However, it also requires a commitment from the founders to repay the loans at fixed dates and with interest. Certain covenants may be put in place as well which entrepreneurs should be aware of and ready to accept in order to grow their business.

Equity financing could be another alternative where the founder can approach angel investors, accelerators or venture capitalists for funding. Third parties would usually grant financing in exchange for a share in the startup. This option does not carry the financial risk of repaying debt. However, it does entail loss of the autonomy of the founder and results in sharing the decision making process with these investors. Despite these options being available, some startups still fail to pick up within their first five years. Some of the reasons could be due to not finding the right financing match which suits the nature of the startup and its products. It could also be due to lack of a metric to measure traction of the business which is required to show future investors or financing institutions what the startup is capable of achieving and securing future financing. By ensuring a comprehensive and continuous assessment of the financial health of a startup is performed, entrepreneurs can possibly avoid such setbacks.

Layla Alqassab
Head of Finance, The Benefit Company
Life & Executive Coach, Coachlq Consultancy Services

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