This Startup Owner Started In The Red But Managed To Get Out Of Debt
Financing is an indispensable part of startups. No matter how good your idea may seem for you, it does not make any sense until you would know how you would source your need. This is what could make or break your business. To get your idea working for you, here are some financial options that you should consider.
Understand the Relationship Between Risk and Debt
When you are aware of how the risk factor relates to the amount of debt that you have, you will better understand why or when you should get a debt for business. Business owners should see debt and risk as very related concepts and these directly affect one another.
Take the case of 20-year-old Atlanta resident Redd Horrocks, who got into debt at a young age. Horrocks owns Instant Voicemails, a voice-messaging business. The British native started off with $24,000 in the red and then racked up another $15,000 when she moved to a new city. All this was because of a lifestyle she didn’t bother to track so that when an accident happened, she discovered that she did not have the money to pay bills.
Horrocks managed to become debt-free after five years, but not without making a lot of sacrifices. “I sat down and took all my debts across all my five credit cards, as well as car loans. I made minimum payments on all o them, then every single extra penny I had gone onto the smallest debt. I took side jobs, freelanced and hustled with the best of them. I sold things I no longer needed,” she said.
It could be said that debt in itself is a measure of a certain amount of risk that a business could be taking on. The amount of debt as compared to a business’s assets can somehow determine whether or not a loan is too large. This debt to equity ratio is a statistical way of presenting to business owners the amount of financial leverage that it has. This shows an owner what he or she is using against what he or she actually has.
Minimize Risks, Increase Financial Power
Not a lot of business owners are aware of the chances that their start-ups would survive. They might miss the fact that having extra financial leverage can save their businesses from getting bankrupt. If they do not have any idea at all, their businesses might be choked off all profits because of a poorly planned cash flow. This is why it is crucial to give your startup a low-risk pattern so that it could be saved from collapsing due to underinvestment.
If people start entertaining the risk of lending you money, then this can tell you more about your financial position. To get a reasonable shot at your financial position, consider the amount that any of your friends can lend you comfortably. Your friends will lend you more money if they get some assurance that their money is safe with you, but this will not be the case if you have developed that habit of not paying them in the past.
Consider Venture Debt Financing
Venture debt is a form of financing for venture equity backed companies that are lacking in the assets or cash flow for traditional financing that opt for greater flexibility. This is a special kind of financing option which is provided to companies that are typically not serviced by banks. Here, the financing is typically presented as a combination of a loan and limited equity investments right. This is why this is the best options for companies that do not possess hard assets, such as technology or healthcare.
Crowdfunding is an emerging form of business financing, and several startups have had successes with this form of financing. This goes out of the traditional form of financing start-ups since entrepreneurs can maintain full ownership and control of their company, but they do not have to be repaid.
This could be the best option for companies that are looking to produce a physical product. Although crowdfunding is pretty new, it has been proven to be a very incredible financing option for start-ups. This is how the Pebble watch and the Ouya gaming console came to be, as they have raised over $10 million through this.
Alex Hanifin and Matt Segal, owners of Alpine Start, began using their personal finances but eventually got into REI and Whole Foods in just a year.
Alpine Start Foods sells single-serve instant coffee geared primarily toward hikers and mountain climbers. “Selfishly, we made the product for ourselves. We found all the pennies under the couch and scraped it together.” Today, the company employs four employees in Boulder, where the coffee is brewed and packaged.
Bootstrapping is when an entrepreneur starts a business with very little capital and later on, goes and builds a company entirely from personal finances or from the operating revenues of the said company. This is also a great way for startups to maintain full control and ownership of their company while they grow. Simply put, the entrepreneur gets a bigger piece of the pie every time a sale is made.
This form of financing encourages strong business fundamentals. Entrepreneurs are not as careful with other people’s finances as they are with their own. If however, a company has to live with whatever it can make, it has to prioritize ways to operate more efficiently.
Your business is just as good as its finances. No matter how good your idea would be, it will not produce anything until some solid financial practices are put into place. Do you know any other alternative options from commercial debts? Share them with us in the comments below.
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