Starting a business can be one of the most challenging and exciting moments of your life. Of course, in addition to the excitement, it also brings its fair share of challenges. If you’ve ever tried starting a business without funding, then you know exactly what I mean. In fact, this is what I’d like to cover today.
So continue reading as we cover seven ways to fund your startup.
Some businesses are deemed too risky for traditional financing sources but require too much capital for most friends or family member to fully fund. If your company falls into this category, you may be a candidate for venture funding.
This type of funding relies upon investors called ‘venture capitalists’. Unlike angel investors or long-term investors, venture capitalists are usually looking for high growth opportunities that allow them to recoup their initial investment within a short time frame. One of the benefits of going with venture funding is that venture capitalists often specialize in certain types of business so if you take on a venture capitalist as a partner, it’s almost like hiring a high-level consultant that’s there to help you grow your business.
If you’re curious as to what to expect from a venture capitalist, ABC’s the Shark Tank is a great example of how venture capitalists decide where to park their money. One thing to keep in mind with VC funding is that if you’re looking for a silent partner who doesn’t get involved in your business venture capital financing may not be the best option.
If you’re an established business that needs short-term funding and you happen to sell on credit terms, you may want to consider factoring. Factoring allows you to sell open invoices – minus a discount – to a financial firm, known as a ‘factor’. Afterward, the factor will collect the invoices on your behalf, while earning a small profit on each transaction.
Companies can usually expect to ‘pay’ the factor anywhere from one to five percent of each invoice.
One of the main reasons companies turn to business factors is that you don’t need good business credit to obtain it. In fact, factoring is based almost solely upon your customers’ creditworthiness. Receivable factoring does have its drawbacks. For example, any invoices that the factor is unable to collect will fall back into your hands, and you may be required to buy the invoice back.
Enter a Startup or Business Plan Competition
If you already have a well thought out business plan, along with a unique business proposition but are short on capital, business plan competitions or startup accelerators could come in handy. It should be noted that your company could be competing with dozens, if not hundreds of other startups and most if not all of them have solid business plans, as well. Hence, it goes without saying that your business plan should be well-vetted.
Similar to venture capital firms, accelerators often specialize in certain types of startups. Common areas of focus for startup competitions are social entrepreneurship, minority startups, technology ventures, etc. While there are several highly publicized business plan competitions, such as Y Combinator and the SXSW Accelerator, the reality is that there are a countless number of them spread all over the globe.
Credit Card Funding
While credit cards do carry a large degree of personal risk, they are an attractive option for any entrepreneur who possesses good credit. Unlike many other forms of business financing, borrowing money from credit card companies does not require you to share your business plans.
One of the biggest misconceptions about credit card financing is that you can only use it for small dollar amounts. However, this couldn’t be further from the truth as there are some cards that offer credit lines up to six figures. Again though obtaining a credit card does require you to complete a credit card application.
While many are labeled ‘business credit cards’, remember that they almost always require a personal guarantee; this means that even if your company went out of business and was unable to pay off the card as an LLC, the bank would still be able to go after your personal assets.
One of the nice things about cards is that so long as you pay more than the minimum due amount, you can pay the balance back over time.
Crowdsourced Funding or Crowdfunding
Crowdfunding is another attractive form of financing that has become much more popular in recent years. The best part about this source of funding is that the finance costs are often minimal. Perhaps more than that is the fact that if you have a memorable concept or a compelling story, you stand to attract large sums of financing in the form of hundreds or thousands of small investments from numerous acquaintances and strangers alike.
Crowdfunding falls under several different categories including:
- Donation oriented
The prevalence of the Internet has helped crowdfunding become a force to be reckoned with in recent years. Kickstarter, GoFundMe, Crowdrise, etc. are some of the more popular crowdfunding platforms.
Many entrepreneurs tend to group venture capitalists and angel investors into the same category since both require giving up equity in exchange for funding. However, there are several differences. For instance, whereas venture capitalists who invest in al stages of companies, angel investors tend to focus on early-stage companies. Another difference is the amount of the investments. Angel financing usually goes up to 1 million USD, while venture capitalists are unable to finance deals that are less than that amount.
Another characteristic of angel investors that makes separates them from venture companies is that they tend to be high net worth individuals who invest as a secondary source of income. However, venture capitalists are usually companies whose sole purpose is to invest in and profit from high growth opportunities.
Take Out a Loan
While we tend to hear the word loan and think of banks, the reality is that there are many different types of institutions that offer loans. In addition to banks, credit unions, the SBA, specialty financial institutions, etc. The best part about using a loan to capitalize your business is that you don’t have to part with any equity.
Our list of financing options is not intended to be all inclusive. Nonetheless, even if you decided to stay within these seven funding categories, there are plenty of avenues with which you can finance your new venture. However, before you begin the process of seeking funds, just be certain that you have all of your other ducks in a row. Do that and you may just find that the road to financing is easier than you’d expected.