Starting a business comes with many fees like the cost of equipment, office space, marketing, transportation, and more. So, where do you find the money to fund these costs?
The great news is entrepreneurs have many options available to them. These include bootstrapping by crowdfunding, using credit cards, getting help from friends and family, and seeking investors.
Whichever method you choose, you’ll need to make sure the pitch for your product is immaculate.
For example, you might think crowdfunding isn’t working for you because you’re not raising capital, but in reality, you just need a better pitch. Methods like this one will allow you time to work on it.
Once you have your pitch set and ready to go, you can begin exploring your funding options. You’ll want to consider how much money you will need, what your credit score is, how much debt you're willing to acquire, and how much ownership you're ready to give up.
Let’s take a look at the methods of funding you may choose for your startup.
Being able to get funded by investors isn’t always a viable option. Bootstrapping is an excellent choice if your business doesn’t require a lot of startup capital. This is typically true of the manufacturing and transportation industry.
Bootstrapping involves sourcing money from family and friends, using personal credit cards, and crowdfunding. This funding method will generally cover the cost for essentials like office supplies, getting incorporated, and a website domain.
Sometimes the thought of raising capital on your own is daunting. But crowdfunding, for example, offers much more than cash. How? If you receive the funding you need from crowdfunding, you know your product idea is viable. That's pretty valuable information.
When crowdfunding, you are essentially pitching your product to entice people to fund you. You’re telling them why it will be useful to them and how it will solve their problems.
Using this method allows you to gauge interest in your product and understand what’s resonating with people and what isn’t. If you hope to get help from an investor in the future, crowdfunding is a great way to see where your pitch needs improvement.
Credit Cards, Friends, and Family
Sometimes you’ll find it beneficial to use your savings or credit cards to fund your savings. Using your savings is ideal if your startup costs are extremely low or if you have a lot of money saved up.
Using credit cards can be useful as well. If you’re worried about interest, there are credit cards for small businesses with a low APR.
Getting money from friends and family is a lot of entrepreneurs’' last resort. Some people feel uncomfortable asking their loved ones for money. Others are afraid that friends or family might begin being needy once the business takes off and hold their investments over their heads.
This won’t always be the case, though. And if you choose this method of funding, you’re eliminating interest rates and potential debt.
Small Business Loans
Getting a small business loan is a lot easier to come by than getting funded by investors. There are far more lenders willing to fund small businesses, and some even specialize in it. Applying for a loan from banks and other financial institutions have a few general requirements.
- You need to have been in business for two years or more at the date of application.
- You need to have a good credit score of at least 640. This can vary depending on the institution.
- Your business needs to have annual revenues of at least $100,000
When applying for small business loans, you should make sure you have the required loan documents. These are usually profit and loss statements, balance sheets, tax returns, and bank statements.
Seeking funding from investors is a good option if:
- Your business has a high initial startup cost
- Your business is considered to be high risk
- You have an extended period for return on investment
- You can’t afford monthly payments, as in the case of loans
Getting funding from investors will allow you to begin your business without incurring debt. The obstacles that are in your way for funding your business alone, like poor personal credit score, won’t affect the deals you make with investors. There are two types of investors who can fund your business.
Angel investors are individuals who are accredited and have a net worth exceeding one million dollars. They usually work alone but may sometimes team up to form a fund with other angel investors. They are more open to newly established businesses.
Venture capitalists typically invest in more mature businesses because they want to make sure it is scalable with growing cash flow. They are responsible for achieving returns for their firm, so they’d prefer to work with a company with a proven track record of growth and profit.
Investing may seem like a grand idea, but when you get funded by an investor, you are giving them ties to your company for the entirety of its life. This means giving up ownership and individual stake and, in some cases, allowing the investor to dictate day-to-day operations.
Funding for businesses is available in many forms. It’s crucial for an entrepreneur to carefully consider each method of financing before making a decision. The choice you make can significantly impact the success of their business.
Bootstrapping, crowdfunding, using personal credit cards, and getting help from family and friends is ideal for a low startup cost company. And, you will always have 100 percent ownership. It will also give you more insight into your market analysis as you pitch your product to like-minded individuals.
Obtaining funding from investors is ideal for a company with high startup costs. You also won’t need to worry about monthly installment fees or potential debt with this method. You will, however, be losing ownership of your company.
With each option comes it’s benefits and drawbacks, so choose wisely and go get that business funded!