A common question among new startups is “How do I find the money to start my business?” Unfortunately, the answer is that there’s no one magical depository of funds. Contrary to what you may see on TV, no self-made billionaire is standing around waiting to throw money at your new and exciting business idea.
Here in the real world, there are many creative options available for funding a new company. It’s important to analyze all aspects of your business plan and future goals, as well as each funding option to start your business off on a solid foundation. One false step in the finance department can have you starting back at square one.
Top 6 Small Business Funding Sources
For small businesses, the SBA can help locate loan opportunities in your area. There are several options available, including microloans and loans that assist with disaster recovery. This avenue may be more feasible than trying to secure a traditional bank loan since restrictions have tightened.
Pros: Risk-averse banks may prefer making SBA-backed loans since the government guarantees up to 85% of the loan against default.
Cons: The application process is lengthy and requires a ton of paperwork.
Community Banks/Credit Unions
While large banks have cut funding to small businesses many community banks and local credit unions, they have increased the number of loans given. Between 2007 and 2011 small business loan volume at small banks has increased from $17 billion to $302 billion.
Pros: Small banks are used to dealing with the nuances of small business loans as opposed to large banks who often have a more rigorous process and deal mainly with low-risk applicants.
Cons: Small banks may not have the variety and depth of services offerings and loan rates may not be as competitive.
The real-world equivalent to Shark Tank, angel investors, are on a regular mission to find the next great idea, but they’re not simply investing their money in startups out of the kindness of their hearts. In return for funding, you’ll be asked to for a sizable percentage of your company.
Pros: Since angel investors are usually working alone and with their own personal money, it can be an excellent way to raise smaller amounts of funding.
Cons: These investors rarely make follow-up investments due to the risk of losing more money.
Crowdfunding is a more recent form of startup funding and has gotten quite popular over the last few years. Platforms like Kickstarter and Indiegogo are great examples of websites that you can use to create a crowdfunding campaign. In general, those who give money make online pledges in return for the initial product at launch, in the form of a donation, or in exchange for some type of small reward.
Pros: The power of the crowd can help you get funding even when traditional methods turn you away.
Cons: It’s easy to forget, but you are actually collecting money and asking for investments here making, security law violations common.
If you have an excellent credit score, you may be able open a line of credit to fund your startup. There is a variety of specific credit cards created just to help entrepreneurs. Talk with your current bank about some of their options.
Pros: If you can make this option work, you will be secure in knowing you are fully in control of your business and do not have to answer to investors.
Cons: This is definitely the riskiest option here since all the risk is being placed on your personal finances.
Similar to angel investors, venture capital firms invest in startups in exchange for part ownership of the business. These firms often specialize in certain industries such as tech startups or healthcare startups.
Pros: VCs can provide large sums of money, advice, and prestige and since these are not loans you do not have to pay interest.
Cons: You will most likely have to give up a significant portion of your company to receive the funding.
Creative Funding Ideas
Make a Trade for Equity
Here you can barter your skills or something you have for something you need. For example, you could negotiate free office space by committing to support the computer systems for all other office tenants. A more typical example would be to exchange equity for legal or accounting services.
Negotiate an Advance
Find a good customer, or business with complimentary services, who sees the value in your idea and ask if they are willing to give you an advance on royalty payments to finish development of your concept. Variations on this idea include early licensing and white-label agreements.
Join an Incubator/Accelerator
Organizations, such as Y Combinator and Techstars, have become very popular in the startup scene. Other incubators are often associated with large universities, community development projects, or sometimes even large corporations. The primary benefit here comes from free resources, including office facilities and consulting services, but many also provide a small amount of funding as well.
All of these financing options require work and commitment from you. Unfortunately, there is no such thing as free money. Funding decisions will always involve a complex trade-off between costs and paybacks, as well as ownership and control.
This article was originally published on the Bunker Labs Blog.