Brought to you by SpotOn:
According to a 2022 survey with 500 respondents, 47% of start-up owners believe their businesses went bankrupt due to a lack of financing and investors, making it the top reason for failure among global start-ups.
Meanwhile, running out of cash followed at 44%. Pricing and cost issues were also cited by 7% of the respondents.
These figures highlight the importance of financing when starting a business. Although you can fund your dream venture with your savings, it may sometimes be insufficient.
This guide will provide the financing options you can consider. It also discusses how to use them and the application process for sources that require it.
1. Bootstrapping or Self-financing
Bootstrapping or self-financing uses only your existing resources, such as garage space or personal savings, to start your company.
This financing method’s most prominent advantage is independence, as one is not beholden to external investors, lenders, or stakeholders.
You’re not obligated to report business decisions, financials, and strategies to anyone, which allows for greater control and flexibility.
To successfully use this approach, remember the following tips:
- Review your assets, savings, and other resources to determine how much you can allot for the business.
- Draft a comprehensive budget plan to manage your investments efficiently.
- Maintain a safety net, and don’t invest more than you can afford to lose.
2. Small Business Loans
Financial institutions provide small business loans designed to help small and medium-sized enterprises.
These loans will provide you with the necessary capital to start your venture. Your small business loan options include:
- Term loans – Standard business loan options for significant, one-time expenses.
- SBA loans – Loans backed by the U.S. Small Business Administration (SBA). The programs include:
- 7(a) loans – Ideal for start-ups that need a working capital of up to $5 million
- 504 loans – Loans secured by property, either equipment or commercial real estate
- SBA CAPLines and lines of credit – Multiple lines of credit to cover specific contract expenses, product exports, seasonal fluctuations, and working capital
- Microloans – Loans that provide up to $50,000 designed for intermediary lenders
- Lines of credit – You have a set credit limit and a draw period, during which you can borrow, repay, and borrow again until the draw period is over.
- Merchant cash advance – Lenders will check your credit card receipts to determine how much you need and can repay.
- Commercial real estate loans – If you want to invest in a brick-and-mortar location, these loans will help you fund your lease or property purchase.
- Equipment financing – These loans are designed for significant equipment purchases, e.g., a restaurant online ordering system software.
To successfully secure a small business loan:
- Review your credit score
- Research and compare your options
- Prepare all the necessary documents
- Consult a financial advisor to obtain insights into the best loan for your venture
3. Angel Investors
Angel investors provide capital in return for convertible debt or ownership equity. They also offer mentorship, industry connections, and valuable expertise.
To find and secure the right angel investor:
- Ensure the investor aligns with your goals, vision, and values. They should believe in your idea, open doors to new opportunities, and provide strategic guidance.
- Consider what else the investor can offer besides funds, e.g., mentorship and network connections.
- Prepare a comprehensive business plan to instill confidence in potential investors. You should also transparently answer questions and be open to feedback.
4. Venture Capitalists
Venture capitalists are private equity investors that provide capital to start-ups with high growth potential. They typically focus on potentially significant returns.
The VC funding stages are as follows:
- Seed stage – Market research, prototype development, and business idea validation.
- Early stage – Supports ventures with products and some traction that have yet to be profitable. The funds are often used for hiring, market expansion, and product refinement.
- Mid-stage – Now that the company has a customer base and is possibly profitable, funding will focus on adding product lines and scaling operations.
- Late-stage – The final funding round before your company goes public. You can use the funds for strategic acquisitions.
When vetting venture capitalists, you must prepare your potential exit strategies to show your understanding of the market dynamics.
5. Friends and Family
In most cases, your loved ones want to see you prosper. Therefore, they’ll likely trust you with their extra money.
Family and friends can lend you flexible loans, which is ideal if you want to keep things simple. However, be realistic about the amount you need, and you must gain their trust with a business plan and projections.
You’ll also write your agreements for accountability and to avoid repayment miscommunication.
6. Crowdfunding
Crowdfunding funds a project or venture by raising money from many people. Depending on your business idea, goals, and expected returns, you can opt for the following types of crowdfunding:
- Equity-based – Backers invest in your venture in exchange for a small stake or shares
- Reward-based – Backers pledge money in exchange for rewards, e.g., exclusive experiences or finished products
- Donation-based – Backers will support your venture without expecting financial or tangible returns
- Debt-based – Instead of a bank, you have multiple lenders
For successful crowdfunding, note the following tips:
- Choose the crowdfunding platform that matches your needs.
- Create a compelling and transparent pitch to inform backers what to expect from your business.
- Promote your campaign across digital media platforms, e.g., emails and social media.
- Regularly update your accumulated amount and engage with backers to maintain trust.
7. Competitions
Many organizations organize competitions to help start-ups with valuable business ideas. In these contests, you can receive funding and business guidance.
To participate, you must have a comprehensive business plan or valuable product.
To succeed, you must develop a project that stands out. Investors and judges will scrutinize your idea, so it should be impressive enough to get the votes.
The good thing about these competitions is that you may get an investor even if you don’t win. You can even build and expand your network connections for future investments and partnerships.
8. Small Business Grants
Companies, foundations, and the government provide small business grants. Examples include:
- SBA grants
- Veteran assistance programs
- Women-Owned Small Business Federal Contract
- State and local grants
- Non-government small business grants from non-profit organizations
- Corporate grants
- Grants for Black, Indigenous, and other people of color (BIPOC) businesses
Each grant has its eligibility requirements and application process. Review the terms and prepare all the necessary documents to secure one successfully.
9. Strategic Partnerships
Strategic partnerships are mutual agreements that don’t involve merging. Besides funding, you can share resources and combine expertise.
To form successful partnerships:
- Find companies that complement your venture. Research their reputation, financial standing, and overall compatibility.
- Outline your objectives and negotiate the terms. Consider consulting a legal counsel to cover all legal bases.
- Regularly review the progress of the partnership and make necessary adjustments.
Overcome the Financial Slumps
You can tailor each funding source to your start-up’s needs. Whether self-financing, securing a loan, attracting investors, or obtaining backers through crowdfunding, a comprehensive plan and persistence are the keys.
Remember that entrepreneurship is as diverse as businesses. With dedication and innovation, you can overcome the financial slumps and turn your dream business into a flourishing venture.
Leave a Reply