It’s fairly easy to come up with a new business idea. What stops most would-be entrepreneurs is the hurdle of financing a new business. If you know your options, however, raising money for your startup may be easier than you think.
Many entrepreneurs rely on personal financial funding, either using liquid cash or selling assets to create additional available capital. Some reach out to friends and family to provide equity, which has its risks. Outside sources of capital are abundant if you know where to look—and how to earn the funding.
When pitching to outside investors and financial sources, you must have a business plan. Investors, including venture capitalists, have a thorough vetting process, and any entrepreneur needs to follow several important steps in order to secure funding. One such step, according to the Business Development Bank of Canada, is to have a well-documented business plan that “defines who you are, describes your business, and documents how you will be profitable.”
Once your business plan is in place and you’re ready to reach out to investors, the infographic below breaks down different funding methods that can help you get your business idea off the ground.
23 Ways to Raise Money for Your Start-Up
- Self-funding
- Common among many entrepreneurs
- To self-fund a business you can:
- Use savings
- Sell assets
- Friends and family
- Friends and family can provide equity
- Be sure investors know all the risks
- Be cautious about selling part of your business to friends and family
- Businesses that fail and loss of capital can:
- Hurt feelings
- Ruin friendships
- Make for unpleasant family gatherings
- Businesses that fail and loss of capital can:
- Angel investors
- Affluent individual who provides capital for a business start-up
- Many angel investors invest online through equity crowdfunding or organize themselves into angel groups or angel networks to share research and pool their investment capital
- Search online for angel investors in your area or talk to local chamber of commerce
- Local chamber may know
- Affluent individual who provides capital for a business start-up
- Crowdfunding
- Money is raised from individual investors
- There are several different types of funding sources:
- Kickstarter and Indiegogo raise funds from regular citizens
- Fundable specialize in funding main-street small businesses
- MicroVentures are venture capital investment banks marrying venture investors with high-tech startups
- Partner
- Partner may or may not become an employee of the business
- Having a strategic partner can benefit the business by aligning resources
- Venture capital
- Provide early-stage funding
- Typically looking to make large investments and take a significant share of the company
- Often a controlling interest
- Small business lenders
- Most lenders will want the loan to be secured by assets of some type
- Designed for business owners who may have trouble qualifying for a traditional bank loan
- Be aware loan rates may be high
- Small Business Administration (SBA) loans
- There are many programs and they vary.
- The qualifications for each are specific.
- They can help facilitate a loan for you with a third-party lender, guarantee a bond, or help you find venture capital.
- Banks
- Traditional banks make small business loans
- They often want the loans secured with asset
- Business Cash Advances
- Advance offered by merchant account companies and digital payment-solution providers
- Receive advances against future credit card sales receipt
- In the past
- Known as “merchant cash advance”
- Reputation as being an expensive way to raise money
- Today
- Offers terms are better
- Hybrid programs that go under names such as:
- Working capital loan
- Line of credit
- Businesses are advanced the money, and repay it from a portion of future sales
- Business pays a fee for the advance
- Loans from Online Loan Sites
- Growing number of loan aggregator websites
- Provide a single platform to apply and submit loan documentation
- Some give loan decisions in hours or days
- Local banks can take weeks
- Microloans
- These are a specific category of small loan
- Usually under $50,000
- Often easier and faster to get than traditional loans
- These are a specific category of small loan
- Credit from Vendors
- Vendors may offer extended repayment terms to good customers
- Some vendors have their own financing programs or terms
- Carrying costs are reduced or eliminated
- Other efficiencies may be realized
- In the long run this can lead to lower operational costs and higher sales
- Possible to negotiate extended repayment terms
- Carrying costs are reduced or eliminated
- Rollovers as Business Startups (ROBS) Programs on 401(k)
- Program where a business owner takes his or her tax-deferred retirement funds and uses them to start or buy a business or franchise
- No early withdrawal penalties will be incurred
- The IRS has issued cautions about ROBS programs
- Complex rules can be easily overlooked
- Unless ROBS are handled 100% correctly, business could end up owing back taxes and expensive penalties
- Program where a business owner takes his or her tax-deferred retirement funds and uses them to start or buy a business or franchise
- Incubator Funding
- Receive up-front cash and guidance from experienced entrepreneurs
- Incubators are often
- Nonprofits designed to teach people to be entrepreneurs as well as help them sustain their business
- Locally sponsored with the hopes of drawing new talent to the area
- Gives the option to network with other people
- Preferred Stock
- Startup companies typically issue
- Common stock to founders and options to purchase to employees
- Preferred stock to investors
- Preferred stockholders have a greater claim to a company’s assets and earnings
- Stockholders have priority when it comes to the financial obligations of the company
- Stockholders don’t have voting rights
- Shareholders get their money, but you keep control
- Grants
- Federal government does not offer any grants to startups
- Many states and non-profit associations offer grants to entrepreneurs who start certain types of businesses
- There are many grants are available to non-profit or ecofriendly startups
- Convertible Debt
- When an investor offers a convertible note, debt is converted to equity sometime in the future
- Conversion is at a discount to the next funding round raised and typically has a cap
- If business raises a huge round, debt investors are protected from getting diluted
- Venture Funding
- Pools investments from many limited partners and then manages that money by investing in startups that meet the objective of the fund
- A working prototype and measurable traction in your business are necessary when looking to raise money from a venture fund
- These funds often invest significantly more than angel investments
- Venture capitalist often looks for a board seat to have control over their investment
- Typically venture capitalists only offer terms to 1 or 2% of the deals they see
- State Tax Credits & Programs
- Apply for any state tax credits that may be available for startups
- Tip
- Can reduce tax bills or offset salaries from new jobs created
- Direct Public Offerings (DPOS)
- Used by U.S. entrepreneurs to raise funds directly from investors
- The amount of capital raised is often smaller than the amount gained through an initial public offering (IPO)
- Doesn’t have the same regulatory restrictions venture capital and bank financing
- Private Offerings
- Equity is offered to a select group of investors
- Investors are typically large organizations, such as banks and pension funds
- Different than IPOs (the sale of securities isn’t available to the public)
- Pledging Percentage of Future Earnings
- Raise money selling percentage of future earnings to investors who buy in upfront
- Done through an online marketplace
Conclusion
There are so many ways to fund your startup. Look through this list to decide which is the best for you and your company.
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