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Deciding to start a new business is exciting, but it can be tough to maintain that eagerness throughout the journey, especially when it comes to finding funding for your startup.
Funding for any business can be challenging, but for startups, it’s notably more difficult. This is because many traditional business loans require at least one year in business, or more, for funding. While this makes the process harder, it’s not impossible. To help save you from some of that stress, we’ve compiled a list of the top 10 reliable ways to help fund your startup business.
1. Fund yourself
First-time business owners can have trouble finding financing without any traction to show for the business, making self-funding a great first option.
Self-funding is a practical move when just starting to finance your startup. While it can be risky to put your savings into your startup, this shows confidence in your business. You need to be willing to bet on yourself, after all, if you’re not willing to invest in yourself, you can’t expect anyone else to either.
Self-funding can involve using personal savings, borrowing from a retirement account or even taking out a home equity loan. Investing in your business this way allows you to maintain full control and ownership of your company; it also helps you avoid paying fees on any commercial loans. When you bootstrap funding, you stretch your resources as far as you can take them on your own, which shows commitment and resourcefulness to potential investors if you choose to reach out to them in the future for working capital.
While there are many advantages to funding yourself, there are also some drawbacks. If things don’t go well, you have to consider the risk of possibly losing your savings. It can also take much longer to save money before you’re able to start and grow your business organically.
2. Friends and family
The people closest to you may be a good source for initial startup funding for your business, especially if traditional lenders aren’t an option for your business at this time. Receiving business loans from people you know and trust shows a lot about your business and its potential. Professional business investors often look to see if you already have commitments from these sources before investing themselves. If your friends and family believe in the business, there’s a much better chance an investor will, too, and provide the working capital needed.
It can potentially be risky to borrow money from family and friends. Be sure to be upfront with them, letting them know that it’s a high risk to invest in a startup, but that you will make the best decisions you can with the information you have regarding your business plan. Writing up terms and setting clear expectations for both parties can go a long way in making sure everyone understands and accepts the risks involved when providing financing for your business.
3. Angel investors
Angel investors or private investors are individuals or companies focused on providing financing capital for startup business ventures in exchange for ownership equity in the business. Unlike venture capitalists, angel investors provide working capital using their own money to invest in startups, usually during the early business funding stages when other investors aren’t prepared to back them yet. Angel investors don’t usually invest as much as venture capitalists, but they can offer mentoring and advice alongside the capital they provide. Working with an angel investor can give your startup more credibility as well as open up doors to high-profile contacts like lawyers, strategic partners, and investment bankers.
One downside of choosing to work with a private investor is that you may have to give up a considerable stake in your company since they’re providing funding so early on.
Many cities have groups of wealthy private investors looking to provide working capital for interesting new business opportunities in their community, but they are often looking for at least some record of success. Angel investors also tend to look for a thought-out business plan and some evidence of gaining traction towards that plan.
The best way to find an angel investor is through an introduction from a colleague or friend. LinkedIn, Angel List, angel investor networks, and lawyers or accountants are other great ways to find an angel investor.
A newly popular and innovative way to source capital for your business is through crowdfunding. Crowdfunding is a way to raise small amounts of capital from a large number of individuals that are contributing personal investments to help fund your startup venture. Crowdfunding taps into the Internet and social media to make your campaign easily visible to a vast network of people, in hopes of gaining a good amount of exposure to your startup as you seek funding.
Crowdfunding is a great way to gauge interest in your business venture as well as drum up marketing before you even launch.
Essentially, crowdfunding platforms work by having an business owner create a detailed campaign page for their business. It will mention the goals, business plan, how they plan on making money, how much funding they need, and what they will be using that funding for. After the profile is set up, people or companies can contribute funds if they like the idea. Each small investment from a backer incrementally adds to your end goal for business financing. Most campaigns involve preordering a product and/or receiving gifts for donations.
Crowdfunding is a great way to gauge interest in your business venture as well as drum up marketing before you even launch.
Keep in mind that crowdfunding is a competitive market to earn money, and it takes a lot of effort on the entrepreneurial side to run a successful campaign. Make sure you have a solid business plan and consider whether the exposure from crowdfunding will be worthwhile, even if you don’t fully fund your campaign, before pursuing this option.
5. Small business grants
Though hard to find, small business grants are worth seeking out as a form of financing for your startup. Unlike loans and investments, businesses may not have to worry about repaying certain grants or potentially giving up equity. Small business grants are money from the government or private companies awarded to businesses in need. Most of the time grants are provided without any expectation of being paid back. In essence, making it free money for your startup.
These grants tend to be pretty specific. It’s best to do research and find your niche before applying so you can tailor your business grant application to align with the goals of the grant your business is applying for.
Groups such as women, small businesses, veterans and minorities may have a bit more luck finding a grant for their startup. There are tons of untapped small business grants available if you take the time to find them, and you could potentially be awarded a reliable and debt-free source of funding for your startup.
6. Personal loans
Banks tend to be the first place small business owners turn to when looking for funding. For business owners with strong personal credit, a personal loan could be an option.
Personal loans are made to the individual, not the startup business, and are based on the client’s creditworthiness.
There are disadvantages to using a personal loan for startup funding that you need to consider. When you take out a personal loan you’re entering a contract with the bank as an individual, not as a business, and the obligation to repay is on you personally. This means that if your business fails, you are still personally responsible for the full repayment of the balance.
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7. SBA microloan
The U.S. Small Business Administration’s SBA microloan program is specifically designed to provide funding to startups and small businesses. The microloan program is fully funded by the Small Business Administration, which partners with a group of designated intermediary lenders to provide new and existing businesses with up to $50,000 of working capital to grow their company.
The Small Business Administration microloan program works by providing direct loans to eligible intermediate lenders who then administer the funds to eligible businesses. Along with providing funding, the lenders also offer up business-based training, technical assistance, and business management advice to help assist in the ongoing success of the newly established and growing business.
With low-interest rates, and desirable terms and business perks, SBA microloans come with a lot of competition. The application and approval process is long and difficult, but worth it if your business qualifies.
8. Line of credit
If you’re looking for a flexible source of funding for your startup, a business line of credit might be a great option. A line of credit is a form of funding that allows access to a predetermined amount of working capital. Basically, your business borrows money when it needs it and pays it back only what is drawn on the line of credit. This type of revolving credit is a great option to overcome gaps in cash flow and grow a new business.
A huge advantage of a business line of credit is that the business only has to only have to pay fees on the amount that has been drawn regardless of the total credit limit. The business can draw from a line of credit for almost any business purpose up to the credit limit, making it an ideal option for startup business funding.
However, most traditional business lenders may require applicants to have at least six months of business history. Another key factor to keep in mind is that it typically requires weekly or monthly payments. So, determining your business’s risk tolerance and financial stability before applying for a line of credit is a must.
9. Invoice factoring
Another form of funding that startups can access with very little time in business is invoice factoring. Invoice financing is a type of short-term funding that allows the business to convert your business invoices into cash advances by getting an working capital advance against the amount due on outstanding invoices.
Invoice factoring is a great way to avoid cash flow issues and release money from invoices more quickly.
This type of funding tends to be easier to qualify for because the invoices serve as collateral and requires very little time in business to be eligible. However, invoice factoring does tend to rely on your business having at least one invoiced customer to be eligible for funding.
10. Business credit card
Business credit cards are another tool to consider when looking to fund your startup. When used responsibly, business credits cards can help provide short-term startup financing to get your business off the ground while helping to build your business credit by offering flexible payment options. However, be sure you have a plan to pay off your balance on time.
Business credits are also a great way to keep your personal and business expense separate. A business credit card is one of the best flexible short-term loan options for startups and small businesses, but it does come with higher requirements and can have higher rates.
Choose your funding wisely
There are many ways to fund a startup, and all of them involve varying degrees of effort as well as risk.
When you start to think about which path you want to choose, it’s important to know all your options and assess which is the most appropriate for your business. Knowing your business financing needs and business goals will help you choose the right type of funding.
Qualifying information to have available
When deciding which financing option is best for your startup, gathering specific information about your business is essential. Most funders want to know where your business is at regarding growth and direction. Make sure to have the following information about your business on hand:
- Time in business
- Annual revenue
- Credit score
- Business plan
Determine your business goals
After gathering your qualifying information, you’ll have to determine your business goals and needs, as the type of cash flow your business will receive will be dependent on this.
If your business is just an idea and in the infancy stages, seeking funding from family, friends, and yourself may be the best option. But if you have a more established business, a bank or an alternative lender or funder could be a better way to go.
Identifying how much funding your business needs is another major factor. If you’re looking at a large one-time purchase, a business credit card could make sense, but a line of credit may be better if your business needs continuous funds. Be sure to calculate how much money your business needs before it starts applying or reaching out to your network and funders for financing.
Many funders and investors will also require a business plan before choosing to provide funding to your startup. The plan should include details such as an outline of your business model, funding needs and how your business plans to make a profit.
Finally, you should go about compiling key documents. These can include business and personal tax returns, bank statements, financial statements, and any legal documents relating to your business.
Despite having limited financing options, securing funding for startups with little or no business history is still possible.
While you work toward obtaining funding for your startup venture make sure you:
- Manage and build your personal credit.
- Work on your business plan.
- Choose the right industry.
- Utilize invested equity.
Keeping this advice in mind, you’ll be sure to find the best funding for your startup in no time.