Startup Funding: What It Is and How to Get It
Self-financing, investors, and loans are the three most common types of startup finance.
It might be difficult to secure startup finance, especially if you want to deal with a traditional lender. Banks can be picky about who they lend money to, requiring high sales volume, cash reserves, at least a year of business experience, and good credit. Many new firms may find it difficult to meet these stringent loan criteria.
Outside of banks and traditional lenders, however, there are numerous beginning business funding choices. Knowing your financial requirements and business objectives will aid you in selecting the best sort of startup finance.
What is startup funding?
Any sort of cash that assists a new business in getting off the ground is known as startup funding. This can take various forms, but the three basic types of startup finance are self-funding, investors, and loans.
Self-funding: You can self-fund, or bootstrap, your startup if you have enough personal funds. In contrast to investors, self-funding your startup allows you to keep complete control of your firm and avoid paying interest (unlike with loans). The disadvantage is that if your firm fails, you may lose your savings.
Investors: Angel investors and venture capital firms seek out high-growth enterprises to invest in. This type of startup finance does not force you to make monthly payments, but it will almost certainly require you to give up some ownership of your company. Some investors will want to be involved in the decision-making process of your company, while others will prefer to stay out of it.
Loans: Small-business loans give you complete control over your organization, but you’ll have to start repaying the loan — plus interest — right away. The majority of traditional lenders, such as banks, will only lend to well-established businesses with solid financials. As a startup, you may need to explore for alternative financing options, such as internet lenders.
Options for startup business funding
Here are some more specific types of funding for startups:
1. SBA microloan
The Small Business Administration of the United States has a number of financing programs, some of which are tailored exclusively for startups. The Small Business Administration’s microloan program, for example, can lend up to $50,000 for working capital, inventory, supplies, furnishings, fixtures, machinery, or equipment. This SBA startup loan has fewer restrictions, and business owners with bad credit (629 or below FICO) or low incomes can apply.
Microloans are available from private and nonprofit lenders to startups that may not be eligible for a traditional business loan. Minority or traditionally underserved small companies are typically supported by these lenders. Microloans typically have favorable terms, and making timely payments can help you develop credit, making it easier to secure additional borrowing in the future.
3. Friends and family
Family loans may be a possibility if more traditional lenders are unavailable. While these loans may have low (or free) interest rates, they can be expensive if they start to harm your personal relationships. Putting the rules in writing can assist both parties set clear expectations and ensure that everyone understands and accepts the risks.
4. Personal business loans
For people with good personal finances, personal business loans can be a good option. Although loan amounts are smaller and maturities are shorter than typical business loans, most are funded within a week after approval and offer cheaper interest rates than other financing choices, depending on your credit score. Just be sure your lender doesn’t prohibit you from using a personal loan for professional purposes.
5. Venture capital
Because there is so much danger involved, venture capitalists prefer to invest primarily in high-growth enterprises. The investor will not see a return on their money if the startup fails. The majority of venture capitalists desire a seat on the board of directors of every company they invest in. Some people, however, will desire even greater control.
6. Small-business grants
Small-business grants can be difficult to come by (competition is fierce), but if you do, you’ll have free money for your firm. Grants do not require repayment or interest payments in the same way that loans do. If you’re a woman, veteran, or minority business owner, you might have a better chance of getting a grant for your firm.
Entrepreneurs can use crowdfunding to raise funds for their enterprises, usually through an online campaign. You can provide prizes to those who donate to your campaign (such as a free product) to attract donations, but you can also tailor the campaign to your requirements and budget. Launching a crowdfunding campaign is straightforward thanks to websites like Kickstarter and Indiegogo.
8. Credit cards
Business credit cards, when used carefully, can provide temporary beginning finance. A 0% introductory APR credit card might be very handy if you need short-term financing for some major expenditures. Make sure you have a plan in place to pay off your balance before the introductory offer ends and the variable APR kicks in.
How to get funding for your startup
To determine the right type of startup funding for your business and improve your chances of receiving it, follow these steps:
Identify how much funding you need. A corporate credit card may be the best option for financing a larger one-time transaction. If you need a large amount of money, an investor can be a better option. Before you start applying for jobs or reaching out to your contacts, figure out how much money you’ll need.
Write a business plan. A business plan is required by many lenders and potential investors. This paper should include information about your business model, financial requirements, and profit margins, among other things.
Compile key documents. Business and personal tax returns, bank statements, business financial statements, and other legal documentation connected to your business are examples of what you might have (such as articles of incorporation, a commercial lease or profit and loss statement).
Decide which type of funding is right for you. Conduct research to determine which type is most appropriate for your company, and then tailor your applications accordingly.
Make sure you can pay it back. Make a strategy for how you’ll repay any money you borrow before you take it out. You may estimate your payments and make sure they fit into your budget by using a business loan calculator or a credit card payoff calculator.
Source: Nerd Wallet