You’re embarking on the adventure of starting your own business. You know you’ll require startup funding, but aren’t sure where to start. Will you self-fund and bootstrap? Will you take investment from others? There are several ways to fund your business, and there’s a process to work through which type of funding is best suited for your particular circumstances.
The first step is to estimate how much money is necessary in the first six to 12 months and create an expense estimate for the following year. Through my experiences, I have created a preferred funding hierarchy: the first funding option on the list (free grants) is the most preferable, and the last funding option (family and friends) is the least preferable. Start at the top of the list and work your way down until you have the funds you need.
On the road to funding
Apply for free grants
Grants are funds received as gifts that you do not have to repay. Many government entities provide grants, from the federal level to state and regional levels. Some corporations provide grants, as well as organizations focused on funding specific communities. Grants are competitive, so make sure prepare a strong application.
Below are some links to help you search for grants:
Federal, State and Regional Small Business Grants
- Grants.gov: A comprehensive database of grants administered by various government agencies
- SBA Local Assistance: Provides you with a list of local Small Business Development Centers that you can contact to find grant opportunities
Corporate Small Business Grants
- Nase.org/become-a-member/grants-and-scholarships/BusinessDevelopmentGrants.aspx: Offers monthly $4,000 grants to small businesses
Specialty Small Business Grants
Once you determine the grants you wish to apply for, you are ready to write your proposal. Grant writing is an art. Thoroughly research the funding organizations so you can better tailor your proposal. Your goal is to create a compelling and well-organized narrative for your reader. Check out our tips for writing a winning grant application here.
If your business sells a unique product, consider using a crowdfunding site like Kickstarter or Indiegogo to raise funds. This allows you to take customer pre-orders and receive funding for manufacturing inventory.
Learn more about the different crowdfunding platforms here.
Apply to accelerators
Accelerators are highly competitive programs designed to help entrepreneurs succeed.
An accelerator generally provides your company with funding (typically between $20K and $100k), guidance and connections. In return, they take a percentage of equity in your company (typically between 5% and 10%). If necessary, you will likely have to move to where the accelerator is located for the length of the program (typically three to six months).
Participating in an accelerator allows you to join a community of other startups in the program, be provided with networking opportunities, and have the chance to elicit feedback from your peers. If you are comfortable with giving up some of your equity, strongly consider applying to accelerators. Be aware that accelerators are competitive, so carefully prepare a strong application.
As an example, Y Combinator has an acceptance rate of less than 2%. In addition, many accelerators like to see two founders on an application, so you may have to consider bringing on a partner.
Here are some of the biggest accelerators to check out:
Obtain funding from an angel investor
Angel investors are wealthy individuals looking to put seed money into a venture. Pitching to an angel investor is a great way to validate your business, and there are many angel investor groups across the world.
In exchange for providing you with funding, angel investors take an equity position in your company. The downside of using an angel investor is that you lose some control, as the angel investor will more than likely take an active role in decision-making for the company.
Search online for groups located in your city or state. Here are some sites and groups to get you started:
Self-fund your startup
Did you know that approximately 57% of startups are self-funded?
Review your personal finances and see how much of your own money you can afford to contribute to your startup. Don’t mortgage your house, but perhaps you have money sitting in a savings account that you could leverage for funding.
If you are not comfortable giving up equity, then you should try self-funding first. However, if you want to de-risk your investment as much as possible, use an accelerator or angel investment before self-funding.
Apply for a bank loan
Traditional bank loans are more difficult for aspiring entrepreneurs to obtain, since your startup does not have any history, assets or revenue. However, most banks can offer you U.S. Small Business Administration (SBA) loans, which means that your lender will be protected if the business fails (the SBA will pay a portion of the loan back to the lender).
There are several SBA loan programs, but the two most common for startups are 7(a) loans and microloans. The vast majority of startups use 7(a) loans since they can be used for a wide variety of business purposes, including working capital, equipment purchases, refinancing debt, buying a business, and buying commercial real estate. The maximum loan amount is $5 million, and the repayment terms can be up to 10 years for working capital and 25 years for commercial real estate.
The drawback of the 7(a) program is that the application process can take months. For a quicker option, consider SBA Express loans under the 7(a) program, which take a few days for an approval decision. The maximum loan amount on an SBA Express loan is $350,000.
Even smaller than SBA Express loans are SBA Microloans. Their maximum loan amount is $50,000 and the loan can only be used toward working capital and not real estate. The maximum repayment term on this type of loan is six years.
The interest rates of SBA loans vary based on credit score, loan size, repayment schedule and current market interest rates. To apply for an SBA loan, visit your bank and ask about different loan options. Additionally, you can visit the SBA’s Lender Match tool here.
Consider taking out a bank loan only if you’re using it to purchase a hard asset that you can resell if the business fails. Hard assets include vehicles, buildings and machinery. I would not seek a business loan if you are using it to build a soft asset like a website or mobile app since there is no resale value if the business fails.
Seek money from family and friends
When it comes to funding from family and friends, I use this as a last resort since I don’t feel comfortable with the risk of losing my friends’ and family’s money. Also, mixing family and friends with business can strain relationships if the business fails. However, sometimes this is the only way to get your venture off the ground. If you choose this option, make sure to make it official by writing out and documenting the loan. Communicate progress regularly to demonstrate professionalism and show you are taking their involvement seriously.
You may have noticed that I did not include credit cards or venture capital on the list. Financing your startup using credit cards is a risky proposition for an entrepreneur. Interest rates are higher in the long-term, and you will be personally responsible for any debt if the business fails. As for venture capital firms, they rarely invest in early stage companies. They need to see traction, customers, and growth.