Startups have the potential to disrupt the market and change our lives through innovative services and products. However, if you are the driver behind a startup, you know how rife with uncertainty the journey is. Funding is perhaps the most challenging aspect of making sure your startup becomes a success. But where do you start?
What is startup funding?
Let’s begin with the basics. Startup capital, the funding necessary for launching your startup, can be sourced in a number of ways. While many types of funding sources exist, we will focus on five of the most popular routes.
Self-funding
Many startup founders tap into their own finances to kick-start their venture. Arguably the most enjoyable benefit of this bootstrap method is not having to answer to funders, having complete control over how and where the money is spent, and not worrying about paying interest. You’re in complete control. But with this autonomy comes the risk of losing your money if the startup fails.
Loans
A straightforward source of funding, loans allow you to remain in full control of your company. Unlike self-funding, you are bound to monthly payments with interest. Loans have the unintended benefit of providing additional motivation to a fledgling business owner since these must be paid back on a regular schedule whether the business succeeds or not. The following are a few types of loans to consider:
SBA microloan. Because it is more flexible than other bank loans, this loan is appropriate for business owners with bad credit or low income. According to the Small Business Administration, this SBA Microloan can give $50,000 for working capital, inventory, supplies, furnishings, fixtures, machinery, or equipment.
Microlenders. Microloans from private and nonprofit lenders are available to startups that may not qualify for a traditional business loan. These lenders typically support minority or otherwise underserved businesses. Microloans typically carry advantageous terms. Making on-time payments can help develop credit, making it easier to access other borrowing sources down the road.
Personal business loans. A personal business loan can be a viable alternative for people with good personal resources. Most are financed within a week of approval and offer cheaper interest rates than other financing choices, depending on your credit score. Be aware that the loan amounts are usually lower and the maturities are shorter than regular business loans. Check with your lender to see whether this type of loan is prohibited for use as a personal loan for professional purposes.
Investors
Another common source of capital for startups is through investors. The combination of an excellent product or service, a well-thought-out persuasive pitch, and a clear vision for growth will catch investors’ interest. While this type of funding does not require monthly payments, you may have to relinquish partial ownership of your startup. This sometimes means that your investors will want a say in your company’s development and trajectory. If you prefer to retain control of these factors, some investors do choose to remain hands-off.
Angel Investors. Angel investors are high-net-worth individuals who invest in smaller, younger businesses that other investors may deem too risky. Angel investors use their own money and typically provide more favorable terms compared to other lenders. These investors are typically investing in the entrepreneur rather than the business’s viability. You can expect angel investors to expect shares of the company in exchange for the considerable risk they are taking on fledgling enterprises. The right angel investors will also offer mentorship opportunities
Venture capital. If you are a more established and proven startup, you can seek seed funding from venture capital funds. Due to the considerable risks involved in brand-new companies, venture capitalists prefer high-growth companies. This is because investors will not see a return on investment if the business fails. Most venture investors give funding in exchange for equity and/or a seat on the board of directors.
Small-business grants. Grants do not require you to pay the funding back or to pay interest. Although this sounds alluring, grants are challenging due to high competition among startups. You will need to know your way around grant writing or hire someone who does. If you are fortunate enough to secure a grant, this is free money for your startup.
Credit
Personal Credit Card. Personal credit cards are a good option for a short time or for essential expenditures. A personal credit card can help supplement in the initial stages of a startup if used responsibly.
Small Business Credit Card. Opening a small business credit card is a terrific way to simplify day-to-day business spending while gaining access to additional benefits like cash back rewards, airline mileage points, purchase protection, and other perks. Unlike a personal credit card, this, along with a business bank account, helps keep your business expenses in one dedicated area. This also helps with monthly bookkeeping and simplifies tax filing headaches.
Crowdfunding
Crowdfunding or equity crowdfunding allows entrepreneurs to generate initial funding for their businesses and may also aid in promoting a company’s products or services. It is not difficult to start a crowdfunding campaign. Create a profile on a crowdfunding website outlining your business and the amount of money you wish to raise. People interested in what you’re trying to do can give cash or online pledges to your campaign in exchange for a reward which could be one of your products or services. A discount depends on the amount donated, some other perk, or a piece of your company’s ownership or profit share.
Friends and Family
If none of the traditional lenders are viable options, tap into your personal network. This consideration must be weighed carefully, though. While optimism can rule a new business owner’s outlook, the potential for business failure is a real factor for anyone. The inability to pay back family and friends can come with personal costs. A good way to hedge this risk is by putting repayment terms in writing. This can help both parties to set clear expectations and ensure that all parties understand and accept the risks. This will also give your lenders more peace of mind.
Not sure where to start?
Blueprint Financial helps small businesses with financial management, forecasting, and overall advisory. Blueprint’s professional accountants will help simplify your financial planning, streamline your bookkeeping and taxes, and help you with peace of mind so you can focus on your front end. Let us work in your business so you can work on your business! Book a FREE consultation today!
