One of the key requirements to launch a new business is getting access to startup financing. However, the funding needed to get a new venture up and running is not always easy to come by. So, how do you turn that great idea into a business or capitalize on an investment opportunity with limited funds? The good news is there are plenty of fund raising sources to consider. Below are some of the options that exist if you are looking for answers on how to fund your startup business.
#1: Personal Savings
Self funding, also known as bootstrapping, is of course the first startup financing option on the table. Saving up enough money to get your business off the ground may take a while but the advantage is that you will not have to pay interest rates or give up any equity.
#2: Borrow from Friends and Family
Other than digging into your own pockets, friends and family are the next best source of funding because individuals who know and trust you are more likely to support your startup. On the downside, borrowing capital from people who are close to you could destroy personal relationships should the business fail. Therefore, make sure to discuss the risks and likelihood of failure with friends and family members before borrowing from them.
#3: Seek Startup Financing via SBA Loans
Since the word financial crisis of 2008, lending requirements have become quite strict. In fact, many lenders, including banks, consider startups as risky bets. Although getting a business loan from a bank may not be easy, you might have better luck funding your startup through SBA loans. The Small Business Administration does not offer direct loans per se. Instead, it guarantees to pay off a percentage of what you borrow from certain approved lenders if you default on the loan. With reduced risk on the lender’s part, this makes it easier for business owners to get financing through SBA loans.
There are many loan packages through this financing option. They may range from surety bonds, to equity and debt financing. Eligibility requirements usually vary and can be very specific for various SBA loans, so make sure to do your homework.
#4: Credit Unions
Unlike banks, credit unions are non-profit financial institutions that offer an attractive financing option for small business owners. Once you join a credit union, you become a part owner and receive shares based upon how much you have on deposit. Most of these member-owned cooperatives offer credit at lower interest rates compared to banks. Other advantages of funding your startup through credit union loans include flexible repayment schedules, less strict lending requirements, and opportunities to make repayments ahead of time without being penalized.
#5: Angel Investors
Angel investors are generally wealthy individuals who can fund your startup directly in exchange for a certain percentage return on investment. It is important to find angel investors who share your passion or happens to be in the same industry. Some angels may offer their experience and introduce you to customers or other investors. Bear in mind also that they expect a handsome return on investment. Therefore, you should be prepared to handle aggressive pressure if the business is not delivering. Some investors may want the business to go in a different direction that clashes with your vision in order to protect their money.
As the name implies, crowdfunding involves many people coming together to pool money towards a particular venture or business idea. This form of fund raising typically takes place online. Investors on crowdfunding sites like Kickstarter, Crowdcube or Indiegogo donate small sums of money, so they are less likely to dish out the kind of grilling and tough conditions an angel investor would.
Crowdfunding campaigns can take different forms. In some cases, people pledge to pre-order a product or service for later delivery in exchange for a reward. This is a great way to validate product demand when launching a new business. In other situations, entrepreneurs seeking financing give up equity stake in exchange for funds.
If your business or idea generates significant interest, crowdfunding can be a great way to tap into a large pool of financing from multiple individuals. However, not all types of products or services are suited for this type of financing.
The Bottom Line
No matter which startup financing route you take, all options come with their set of pros and cons. Make sure to examine all the alternatives carefully and do adequate research before making any commitments.