Raising startup capital is one thing that every entrepreneur needs to consider when starting a new venture or keeping one going The good news is that there are many different options available for entrepreneurs looking to raise money.
Understand the Different Types of Startup Capital
There are three main types of startup capital: equity, debt, and hybrid financing. Equity means giving up ownership of the company in exchange for shares of stock. Debt means borrowing money from banks or other lenders. Hybrid financing combines both equity and debt.
Find Investors Who Are Right For You
If you’re looking to raise startup capital, there are several different ways to find investors who will be right for you. First, consider whether you need funding at all. If you’ve got a good idea and some savings, you might not need any outside investment. Second, think about what kind of investor you want. Do you prefer angel investors, venture capitalists, or private equity firms? Third, consider where you would like to invest. Would you rather invest locally or nationally? Finally, consider the type of deal you want. Is it an early stage round or a later stage round?
Be Prepared to Negotiate
If you’re looking for funding, you will likely have to negotiate with investors. This means you will have to make concessions and compromises. Don’t be afraid to ask for what you want.
Here’s the List:
- Personal Savings – Sure, if you had enough saved, you would probably not need to read about other startup funding sources. It is important that you as an entrepreneur have some “skin in the game;” that is, you believe enough in the business to have invested in it yourself.
- Home Equity Line of Credit – Speaking of skin in the game…do you have equity in your home? Do you really believe in your business? If you are willing to put it all on the line, this is one way you can.
- SBA Loans – The Small Business Administration of the U.S. Government “helps small businesses get funding by setting guidelines for loans and reducing lender risk. These SBA-backed loans make it easier for small businesses to get the funding they need.” Click here for more.
- Small Business Investment Company – SBICs are licensed by the U.S. Small Business Administration. An SBIC is a privately owned company that’s licensed and regulated by the SBA. SBICs invest in small businesses in the form of debt and equity. The SBA doesn’t invest directly into small businesses, but it does provide funding to qualified SBICs with expertise in certain sectors or industries. Those SBICs then use their private funds, along with SBA-guaranteed funding, to invest in small businesses. This can be through loans or equity investments.
- Business Line of Credit – A line of credit is an amount of money available to a business for business expenses. These are obtained through banks. Most banks will require some business history – at least six months likely – but will enable the business to establish credit.
- SBA Microloans – Originally created to make startup business funding more easily accessible to women, minorities, and veterans, the U.S. Small Business Administration’s SBA microloan program partners with community-based, nonprofit, intermediary lenders to provide small business borrowers with $500 to $50,000. Microloans carry interest rates between 8% and 13%, and term lengths do not exceed six years, traditional funding with these desirable rates and terms are rarely, if ever, available to brand-new businesses outside of this SBA-subsidized program.
- Equipment Financing – Equipment financing is the use of a loan or lease to acquire equipment for your business. It allows your business to acquire or upgrade equipment without having to come up with the funds all at once. The equipment serves as collateral for the loan, and APRs are generally good, but you will need decent credit to qualify.
- Invoice Financing – Invoice financing is essentially using the amount customers owe you – your receivables – as collateral for a loan or line of credit. It can be an effective way to improve cash flow by making cash available to the business sooner than it would be if it had to wait to be paid for invoices. It is more useful the longer the business has to wait to be paid. You won’t need to be in business long to take advantage of this option, but you will need outstanding invoices.
- Personal Loan – If your credit is good, you might be able to get a personal loan. Typically, that means a simple loan that requires no collateral. You will of course have to provide evidence of ability to repay the loan.
- Your Current Paycheck – If you are starting a business while keeping your day job, why not use some of your current income to fund the startup? You will probably need to exercise some strict financial – that is, spending – discipline to make this one work. But what better way to develop the frugality that most startups need?
- Loans from Friends and/or Family – Do your friends and family trust and believe in you and your entrepreneurial dream? Perhaps they will loan you the money to help you realize it. Of course, there is insufficient space here to itemize all of the things that could go wrong under these circumstances, but it can be a viable approach.
- Venture Capital – Venture Capitalists are bombarded with business plans daily and only a few of those plans get read, and even fewer funded. That said, it is not impossible. If you plan to go this route, you had better be on you’re A game. You will need a great idea, an exceptional unique sales proposition, and outstanding management. Having connections with a firm or firms would certainly help. You must also be prepared to turnover a considerable percentage of equity in your business.
- Angel Investors – On the degree of difficulty scale for raising capital, Angel investors are a perhaps a notch or two below venture capital firms and funds. An angel can be anyone with the financial means and desire to invest in someone else’s business. There are those who do deals frequently, and those who might only try it once with someone with whom they are familiar. Know someone with substantial resources? Ask. You don’t ask, you don’t get.
- Startup Incubators – These are organizations that are set up to assist new businesses in a wide variety of ways including networking, marketing, market research, advisory, loan and financing leads, management, and numerous other endeavors. They can be privately-owned, non-profit, academic institution based, or branches of venture capital firms. Here is a list to get you started if you want to find one:
- Startup Accelerators – These are organizations that typically assist seed or early-stage businesses that need assistance scaling their companies or products. The accelerator will often take an ownership position with its startups, so they provide capital as well as a broad range of assistance.
- Business Plan (or Pitching) Competitions – There are many opportunities out there for those with a developed business plan to participate in competitions to win prize and/or seed money for their ventures. Set up a Google alert to have these delivered to your inbox.
- The Business Itself – Sure, if the business were generating cash flow, you wouldn’t be reading this post. But don’t go looking for outside funds, loans or equity investments, until you are sure that you can’t grow within your current financial situation.
- Crowdfunding – This is an excellent way to raise funds, particularly if you need them for product development and production. Investors (customers) pay for the product upfront with the idea that they will receive it once product development is complete and the item ships. Check out Kickstarter, Indiegogo, and Patreon.
- Grants – The nice thing about grants is that they don’t have to be paid back and you don’t have to surrender equity in your company to get one. The not-so-nice is that they are not easy to get and they are typically given to established businesses. Here is a good place to get a feel for what is out there.
- Barter – Consider your product and service and whether you might be able to offer it to someone in another field who might be able to help you. It could be an accountant, a contractor, a supplier, or any other person or company that can use what you offer.
- Convertible Debt – No sense pretending that this is a simple solution to your funding needs; you will need a lawyer to help set this up. The short description of convertible debt is a loan that is paid back at a later date with shares of the company. No principal or interest is paid by the company along the way. The investor seeks to benefit from his discount when the value of the company rises over time and additional funding is secured at the higher company valuation. See here for a more detailed explanation.
Have you written your business plan yet? If not, we have a quick and easy way for to get started.