Determining the best option to get funding capital for a startup (and then securing that funding) is one of the biggest challenges that an entrepreneur will face. Your business depends on it.
The choice is an important one, determining at least in part whether or not your business is able to sustain itself. Startups have a high failure rate and oftentimes it boils down to financing.
Research found that running out of money was the second leading reason why startups failed.
With the rise in crowdfunding, startups have a lot of options to choose from. Not all options, however, are created equal.
Consider that even the best options have their own benefits and drawbacks and that even the best options on this list won’t be suited or even feasible for every startup.
In short, it’s a complex, but important decision that businesses need to consider carefully. Here are 5 of the best options that tend to serve startups well across the board.
90% of startups are self-funded or “bootstrapped.” They don’t have to put any equity or control on the line.
However, some level of self-funding is always necessary, especially if your bigger plan is to get investors on board. Either way, you go about it, you are going to need to have something of your own to work with.
It boils down to this: if you are unwilling to invest in your own startup, you won’t be able to instill much confidence in your investors.
Many entrepreneurs who want to get any attention from investors put nearly all of their savings into their business. It’s very rare that a founder won’t have to invest some of his or her own money.
So, whether you are planning to self-fund your startup or not, you will at least need to have some sort of self-generated capital growth already in place.
2. A Small Business Loan
Startups have a lot of options in the way of loans. One of the best options, however, is to get a small business loan. Most cities have a Small Business Association (or the equivalent) that offers specialized loans for startups.
The benefit of this type of loan is that it’s reliable – conditions are clear from the beginning regarding payment and interest terms and funding is available at once.
This option also allows more freedom in terms of what the startup chooses to do on a daily basis as the bank’s focus is the return on investment. Other funding options will stake a claim to your business.
If you do manage to secure a small business loan, it can also help you with securing other possible lines of funding as investors will see you as a legitimate entity.
A small business loan also offers a lot of resources in the way of networking which is a nice asset.
Of course, no funding option comes without trade-offs and the small business loan is no exception. A small business loan requires that you can prove your profitability from the outset. so that you are not a risk. Typically, this requires showing some level of experience.
In short, funding isn’t always guaranteed. Secondly, this type of loan typically means having a business plan in place and having a clear plan as to how all of your funds will be allocated.
Business plan software can help you with this process for those who are thinking about this option.
3. A Loan From Family or Friends
Next to a small business loan, a loan from family or friends is another solid option for many startups. It’s not without its cons, but it’s certainly among the recommended choices, even though many entrepreneurs tend to approach it with caution.
The benefits of this type of loan are that it tends to come with good rates and requires little in dealing with bureaucracy. The biggest con is that you risk jeopardizing a relationship if your business doesn’t work out, but at the same time, this risk can be mitigated if handled properly beforehand.
There are typically two ways to approach this type of loan: selling them a share or taking their money as a loan, with the second option offering a much more straightforward path.
The key here is to treat your family or friend like you would any other professional and to draft up a professional loan proposal. Some sort of contract management is necessary if this option is to work.
There are a lot of software on the market that can help you to draft up a professional loan proposal, and you might also consider using a student loan calculator to plan out the repayment terms, making it clear and transparent for both parties involved.
4. An Angel Investor
When it comes to investors, angel investors tend to be the better option over venture capitalist investors, at least in the beginning.
Angel investors are wealthy individuals who are looking to invest in startups. They are similar to venture capitalists but there are some differences with the big one being that venture capitalists take roughly 20 to 30 percent of your company and exert more control over your company.
Angel investors offer a smaller amount of funding over venture capitalists but with that comes more freedom. They are also very invested in your business and tend to offer access to valuable resources like business connections.
Crowdfunding is one of the newer options available when it comes to securing funding capital.
If you’re not familiar with crowdfunding, it works like this: people will fund your business if they like your idea. Pledges are typically based on the idea that they are pre-buying the product. Incentives and rewards are also offered along the way.
This is done via a crowdfunding platform like Kickstarter. This is the biggest funding platforms, but there are a lot of others to choose from.
Some startups will create a demand via crowdfunding and then go on to secure funding through venture capital firms. Another benefit is that it gives startups the rare option to validate their product first.
While this one is a newer funding avenue, it can be an effective one. Some of the most successful companies went on to raise millions of dollars.
The downsides are that it takes time to generate funding. It’s competitive and it also doesn’t always work.
But it’s still a viable option.
When it comes to securing funding capital, entrepreneurs have a lot of options. The key is to explore those options in detail and to speak to an authority on the topic.