Starting a business can put entrepreneurs in one of the most challenging situations. Of these problems, accessing additional capital is one of the most significant hurdles and one that requires business owners to overcome wisely.
There are several potential sources for small business funding. Each option has its upsides and risks; some may be more viable than others, depending on your situation and priorities. In some instances, it can be helpful to hire the services of a financial advisor, and others to help you come up with more intelligent choices.
In the meantime, here are a few of the traditional and non-traditional startup financing sources to propel your new venture:
1. Personal Funds And Assets
Business owners often believe in their products or services, so they’re willing to invest their savings or use their assets as collateral to get additional capital. By bootstrapping, startup owners with a few thousand dollars to spare can prove their commitment to their business project, which could convince others to inject additional capital.
2. Family And Friends
More popularly known as ‘love money,’ this strategy involves asking loved ones to help boost business capital. Repayments and other loan conditions will depend on your discussion with family members and friends as a business owner. For instance, they may ask for equity in your business or impose interest fees.
It’s up to you to negotiate a win-win solution. If taking this route, it’s essential to consider the transaction as purely business, even if you’re close to the person helping you. Regardless of the arrangement you end up agreeing to, it may be helpful to draft a document and stick to the stated terms to avoid damaging your relations moving forward.
3. Business Loans
Lending institutions are perhaps the most popular business funding sources, although non-traditional lenders are slowly reclaiming a portion of the market. Entrepreneurs must learn to shop around this route, as banks have different loan considerations and repayment structures. Generally, banks would only consider companies with excellent credit and financial reputations. Sometimes, a secured business loan, or one that requires collateral, may be granted instead of unsecured business credit.
Similarly, banks offer several business loan products. Instead of taking cash, getting a business line of credit, which works like a business credit card, can help organizations with business purchases.
For startups, a business owner’s credit score will be used as a basis for the loan approval, including the amount to be released, interest rates, and other loan terms. A solid business plan must also back this requirement.
Some business owners may find this non-traditional method an attractive option because it doesn’t involve lending institutions. Crowdfunding will require business owners to create an account on a certain platform, present their business idea, and request potential investors to contribute specific amounts in exchange for the product or service.
As several other startups compete for investors in the crowdfunding channel, a startup business idea must be fresh and valuable to your target market or chosen niche. Additionally, costs may not be enough for an entrepreneur’s needs, so a company may need to convince a few potential investors.
5. Venture Capitalists
A venture capitalist (VC) is your go-to investor if you need additional funds for startups and new businesses. VCs extend their hand to businesses with potentially profitable goods and services. They ask for a stake in the company in return for the capital boost. Startups that require a considerable amount of capital may find this option attractive, but only when owners are open to giving up some ownership or control of the budding company.
Although VCs may decide to fund enterprises from all sectors, they’re most common in specific business niches that require technology use.
6. Angel Investors
As with crowdfunding, there are specific platforms that business owners can go to if they want to access funds from angel investors. These individuals are often retirees considered experts in managing specific businesses and top corporations. They can provide small businesses with financial boosts of up to USD$100,000 in exchange for a seat on the company’s board or as a consultant for the management department.
Like VCs, angel investors look at profitability and viability when evaluating startups.
7. Government Grants
In most countries, small businesses comprise over 99% of the entire industry. To recognize their economic contributions, governments worldwide have launched several assistance programs to fast-track and develop these economic drivers. Hence, businesses must check the government agencies concerned to access information about specific programs.
For instance, the United States Small Business Administration has a small business loan facility that offers below-industry interest rates. It also partners with other organizations to make it easier for minority groups, such as women, veterans, and immigrants, to open and run a business.
There’s one caveat, though: applying for a grant is challenging as there are strict processes that evaluators must adhere to, so it pays to prepare at all times.
There are several options that startup owners can turn to for a much-needed capital boost. Traditional and non-traditional funding sources can be accessed online or in person. Tapping one or a few of the capital sources discussed here can be a good decision in the long run, depending on an organization’s needs and preferences.