In many ways, venture capital is often promoted as one of the best options for startup businesses in the commercial world.
However, there are significant challenges with this type of investment model, especially when you consider that venture capital often encourages companies to prematurely scale and incur costs that they cannot sustain.
In this respect, it can be argued that venture capital is as incapacitating as slow customer adoption and technical debt for startups, which is why aspiring businesses may benefit from considering a more diverse array of options.
We’ll explore some of these in the post below, while asking which option may be the most suitable to suit your needs.
In thriving startup communities such as Silicon Valley, the notion of funding a new business venture through passive income is often frowned upon.
However, much depends on how you approach this endeavor and the precise type of passive income that you look to generate, based on your financial objectives and underlying appetite for risk.
One particularly appealing method is to launch smaller businesses and tools as an entrepreneur, which will ideally relate to your larger venture and have the potential to become largely self-sufficient over time.
With this type of model and approach, you can quickly create passive income streams that enable you to accumulate wealth, while potentially creating tools and resources that can be used to scale your primary venture in the future (reducing costs in the process).
It’s also possible to build several passive income streams with relative ease, creating a scenario where you can easily cover basic living costs and divert more of your time towards launching a fully-fledged commercial operation as quickly as possible.
Of course, there are other, riskier methods of creating passive income available to entrepreneurs, such as investing cash into various asset classes and markets.
The depth and complexity of the financial markets means that you’ll ideally need some existing knowledge and experience of trading in specific assets before investing your hard-earned capital, however, while you’ll need to identify opportunities that suit both your capital holdings and existing appetite for risk.
This is an option that requires careful consideration, particularly as markets such as the foreign exchange are derivative in their nature and can cause you to lose significantly more than your initial deposit without imposing the requisite risk management tools.
Ultimately, the level of financing that you require in your business can vary wildly, as while ventures require significant funds to successfully launch, others need capital to optimize their cash flow and cope with prohibitive invoice terms once they’ve started trading.
As a supplier of goods and materials to large companies, for example, you may be subject to an agreement that allows them to settle their invoices on 60 or even 90-day terms.
This can be incredibly prohibitive for startup ventures with limited resources, as labor and delivery costs mount and begin to eat into working capital levels.
One potential solution to this lies in invoice financing, which essentially describes a range of asset-based funding facilities that are far more accessible than venture capital. In simple terms, this option enables companies to sell their accounts receivable to a third-party for a fixed percentage of their value, enabling them to secure capital quickly and repay their debt once the client has settled their invoice.
This creates a short and affordable cycle of debt, with the key being to identify lenders who will ‘buy’ your invoices for a competitive percentage of the total sum owed.
The speed of payment is also imperative, especially for cost-intensive firms that rely on volume to support their business model.
When used correctly, this method of funding can drive short-term growth and optimise cash flow levels in real-time, without forcing borrowers to incur high levels of debt.
OK, we hear you ask, but what should you do in instances where you have a high-cost startup and remain unconvinced by the merits of venture capital?
Well, one option is to consider property finance, which is a secured business loan that utilises existing residential or commercial real estate (or a property portfolio) as collateral.
The major benefit of this is that it can unlock potentially huge amounts of cash for your business, depending on the value of the property in question and the extent to which it can be leveraged.
According to research from the British Business Bank from overseas, this type of asset based small loan has risen in popularity in recent years, while various options exist in the forms of term loans, bridging loans and interest-only alternatives.
This creates additional flexibility within a relatively rigid structure, as does the fact that repayments can (in some instances and depending on your credit score) be spread over a period of years.
Of course, this option is only accessible to an entrepreneur with viable real estate assets and resources that can be used as collateral to secure the desired amount of capital.
Similarly, such a lending model puts your existing assets and property portfolio at risk, as the failure to make consistent repayments as agreed will see the property seized as a result.
Young business man… -DepositPhotos