Starting a business can be an expensive venture. In an ideal situation, you get your business off the ground with as few dollars as possible to try out the idea. Once the idea is proven or at least shows signs of success, you can ramp up your need for financing.
7 Business Startup Funding Sources
Here are 7 different sources of funding to consider when starting your business.
Your Own Income
You don’t want to bite off more than you can chew by getting serious financing or investing a lot of money into sunk costs when starting your business. When you first start out you want to be as small and nimble as possible. If you have a regular job you can use your monthly income from work to finance the business on the side to prove the concept.
Cost and Risk: Missed opportunity to save for other personal goals, lost interest or growth if the money had been saved or invested, but low financial risk since you are not going into debt to a third party.
There comes a time when you need to invest significant dollars into your business. Not many people have thousands of dollars sitting around to dump into buying equipment or supplies for a business venture. For many people the easiest method of funding has been their credit score. One credit card could approve you for the thousands of dollars you need to spend to ramp up.
Cost and Risk: You will pay high interest rates ranging from 14% to 20% while suffering higher risk, because you will still owe the money if your business fails.
Family and Friends
Your family and friends want to see you succeed. They may be willing to loan you money or buy into an equity stake in your firm if they believe in the idea. You would be able to set up the terms as you see fit.
Cost and Risk: Costs will be determined by your agreements with your investors. The greater concern is the large personal risk incurred due to the fallout that occurs if your business fails and your closest friends and family members don’t get their money back.
Business Plan Competitions
For larger business ideas that need funding from the beginning, entrepreneurs can turn to business plan competitions. Your plan is presented and compared to those of other competitors, and the winners can walk away with as much as $100,000 in funding to get their business off the ground.
Cost and Risk: Minimal. Your only costs would be traveling to wherever the competition is held and the time you spent preparing.
Entrepreneurs looking for significant funding can also turn to angel investors. Angel investors fall between friends and family investors and venture capital groups. These investors are often retired executives and entrepreneurs, and are willing to invest smaller sums of money that large venture capital groups cannot profit from investing. Angels also do not normally require a seat on a board of directors.
Cost and Risk: As with any outside investment, angels will require either convertible debt or an equity stake in the company.
The Small Business Administration is set up to help facilitate loans to small businesses from banks. You will need a solid business plan and usually a proven concept before moving forward. Getting past underwriting requirements can be difficult.
Cost and Risk: Your primary cost is the risk of taking out a loan and paying interest, but you may be able to secure smaller amounts of funding than you would with other investors.
The two biggest letters in entrepreneurial investing are VC. Venture Capital groups pool together money from investors and take calculated risks on startups. VCs hear dozens of pitches every year, and only invest in a handful. When they do invest, they invest strongly — usually in the millions of dollars range. Venture capitalists will normally require a board of directors, a seat on the board, and a defined exit strategy. The goal is typically to sell the company to an acquirer or to go public with an IPO within 5 years.
Cost and Risk: Venture Capital is a classic “go big or go home” mentality. VCs can take a significant chunk of equity from your company. Entrepreneurs are willing to give up a lot of control if it means the company has a larger chance of succeeding and making them rich, too.