While some companies in startup mode seek venture capitalists and other big-time investors, the vast majority of fledgling businesses start smaller, using their savings, personal loans or money borrowed from close friends or family. In fact, less than 1 percent of startups receive venture funding, according to a 2013 article by nonprofit entrepreneurship champion Kauffman Foundation.
While this may sound discouraging, it shouldn’t deter you. Other options are available, and these sources may better support your business’s mission. Time is critical in the startup phase, so review the following funding options to identify a source with the greatest potential to provide what you need.
Your own money
Most startup businesses use their own funds, at least in the very beginning of their venture. The primary go-to sources include credit cards, savings and personal loans. These sources are usually available quickly to most people with decent credit and some collateral. If you choose this route, keep a few key success factors in mind.
- Choose credit cards carefully and be sure to investigate short-term and longer-term credit. You may carry the card debt longer than you plan, so steer clear of rates that fluctuate, no matter how tempting the short-term savings may be.
- If you plan to take out a loan, realize that it will be a personal loan based on collateral, not a business loan. Banks do not typically consider startups as worthy of credit; instead, they lend based on proof that you have existing assets to cover the loan repayment.
- Alternative lenders — CAN Capital, OnDeck, Lendio and a growing field of others — offer another option outside of banks for securing the funds you need. While they will also look for proof that you can repay, they will typically lend to a broader spectrum of people than a traditional bank.
Friends and family
If you have family or friends who are interested in supporting your venture, clearly spell out the investment amount and the terms of repayment, including timeline and the interest you will pay (if you plan to pay with interest). Be sure to make it clear that while you have faith in your idea and your abilities, this is a risky investment — the Bureau of Labor Statistics finds that most new businesses fail in the first five years. This statement is not meant to deter your investors; it’s to let them make an informed decision that is less likely to result in hard feelings if things go south.
One other factor to consider is equity. If you trade ownership in your company with investors, plan for success and avoid giving away huge chunks of your business early in the game. Also, spell out the lender’s role in advising you on your business. If family and friends will have an advisory role as part of their investment, be explicit about how you will keep them apprised and how often you will tap them for help. Otherwise, your funder may expect to have a say in every business decision.
Some startups receive funding through crowdfunding sites like IndieGoGo and Kickstarter. Tapping these resources successfully depends in part on understanding the differences between the platforms so you can pursue the one most likely to work for you.
- Kickstarter, whose users have pledged more than $1 billion, only allows creative projects (such as games, technology projects and art) and takes an all-or-nothing approach to funding. If you don’t reach your monetary goal, your funders keep their money and you don’t get funded.
- IndieGoGo allows users to raise funds for anything, including creative and entrepreneurial ventures, and it lets you choose from several different funding models.
Once you’ve chosen a platform and set up your campaign, you’ll need to create incentives for different levels of pledges and get busy promoting your business.
Angel funding comes from investors who provide money in exchange for equity and an expectation of rapid growth. These are typically wealthy people who are looking to put money into startups with huge potential. They also often provide strategic guidance and resources to protect their investment. While this option only works successfully for a very small percentage of startups, you should pursue it if your business has the potential for rapid growth and you have a solid plan to back up your expectations. Platforms such as Gust (formerly AngelSoft) which has funded more than 1,800 startups in the past year, allow startups seeking funding to upload a video and description so that potential investors can evaluate opportunities. Your accountant or attorney may also be able to connect you with wealthy potential investors interested in funding a startup with huge potential.
The U.S. Small Business Administration has information about loans and grants designed for small businesses on its website. However, government grants are not widely available for startup businesses except those in the areas of scientific and medical research and conservation efforts. Check out Grants.gov for additional information on eligibility and availability of federal, state and local grant programs for businesses in many areas including law, humanities and natural resources. In some cases, grants may require you to match funds or pair the grant with other financing such as loans.
Gathering enough investment dollars for your business can be a tough challenge for any startup business. You will likely need to tap into a few sources of funds, so explore your options and target the resources that will help you build and sustain business momentum.Print this article