Deciding to start a new business is exciting, but it can be tough to maintain that eagerness throughout the journey, especially when it comes to finding funding for your startup.
Funding for any business can be challenging, but for startups, it’s notably more difficult. This is because many traditional business loans require at least one year in business, or more, for funding. While this makes the process harder, it’s not impossible. To help save you from some of that stress, we’ve compiled a list of the top 10 reliable ways to help fund your startup business.
1. Fund yourself
First-time business owners can have trouble finding financing without any traction to show for the business, making self-funding a great first option.
Self-funding is a practical move when just starting to finance your startup. While it can be risky to put your savings into your startup, this shows confidence in your business. You need to be willing to bet on yourself, after all, if you’re not willing to invest in yourself, you can’t expect anyone else to either.
Self-funding can involve using personal savings, borrowing from a retirement account or even taking out a home equity loan. Investing in your business this way allows you to maintain full control and ownership of your company; it also helps you avoid paying fees on any commercial loans. When you bootstrap funding, you stretch your resources as far as you can take them on your own, which shows commitment and resourcefulness to potential investors if you choose to reach out to them in the future for working capital.
While there are many advantages to funding yourself, there are also some drawbacks. If things don’t go well, you have to consider the risk of possibly losing your savings. It can also take much longer to save money before you’re able to start and grow your business organically.
2. Friends and family
The people closest to you may be a good source for initial startup funding for your business, especially if traditional lenders aren’t an option for your business at this time. Receiving business loans from people you know and trust shows a lot about your business and its potential. Professional business investors often look to see if you already have commitments from these sources before investing themselves. If your friends and family believe in the business, there’s a much better chance an investor will, too, and provide the working capital needed.
It can potentially be risky to borrow money from family and friends. Be sure to be upfront with them, letting them know that it’s a high risk to invest in a startup, but that you will make the best decisions you can with the information you have regarding your business plan. Writing up terms and setting clear expectations for both parties can go a long way in making sure everyone understands and accepts the risks involved when providing financing for your business.
3. Angel investors
Angel investors or private investors are individuals or companies focused on providing financing capital for startup business ventures in exchange for ownership equity in the business. Unlike venture capitalists, angel investors provide working capital using their own money to invest in startups, usually during the early business funding stages when other investors aren’t prepared to back them yet. Angel investors don’t usually invest as much as venture capitalists, but they can offer mentoring and advice alongside the capital they provide. Working with an angel investor can give your startup more credibility as well as open up doors to high-profile contacts like lawyers, strategic partners, and investment bankers.
One downside of choosing to work with a private investor is that you may have to give up a considerable stake in your company since they’re providing funding so early on.
Many cities have groups of wealthy private investors looking to provide working capital for interesting new business opportunities in their community, but they are often looking for at least some record of success. Angel investors also tend to look for a thought-out business plan and some evidence of gaining traction towards that plan.
4. Crowdfunding
A newly popular and innovative way to source capital for your business is through crowdfunding. Crowdfunding is a way to raise small amounts of capital from a large number of individuals that are contributing personal investments to help fund your startup venture. Crowdfunding taps into the Internet and social media to make your campaign easily visible to a vast network of people, in hopes of gaining a good amount of exposure to your startup as you seek funding.
5. Small business grants
Though hard to find, small business grants are worth seeking out as a form of financing for your startup. Unlike loans and investments, businesses may not have to worry about repaying certain grants or potentially giving up equity. Small business grants are money from the government or private companies awarded to businesses in need. Most of the time grants are provided without any expectation of being paid back. In essence, making it free money for your startup.
These grants tend to be pretty specific. It’s best to do research and find your niche before applying so you can tailor your business grant application to align with the goals of the grant your business is applying for.
6. Personal loans
Banks tend to be the first place small business owners turn to when looking for funding. For business owners with strong personal credit, a personal loan could be an option.
Personal loans are made to the individual, not the startup business, and are based on the client’s creditworthiness.
There are disadvantages to using a personal loan for startup funding that you need to consider. When you take out a personal loan you’re entering a contract with the bank as an individual, not as a business, and the obligation to repay is on you personally. This means that if your business fails, you are still personally responsible for the full repayment of the balance.
