One of the biggest challenges for entrepreneurs and small business owners is how to get funding for a business to start up – and eventually grow their business. Most healthy businesses will need corporate funding at some point.
Startups have to deal with startup costs and running businesses have to finance growth and working capital.
Deciding whether to take on some type of debt is quite common, but the funding options depend on what type of business you have.
Age, position, performance, market opportunities, team, etc. are very important. So you should tailor your funding search and approach according to these factors.
In this article, we’ll cover the following ways on how to get funding for a business.
What to Consider Before Accepting Funding
Unfortunately, financing and investing involve money; and money leads to predatory business practices, scams, and the like. Here are some reminders to help you avoid the pitfalls.
Be careful who you are receiving money from
Do not view private placement, angels, friends, and family as good sources of capital just because they are described here or taken seriously in another source of information.
Some investors are good sources of capital and some are not. These less established sources of investment should be treated with extreme caution.
Have it given to you in writing
Never spend someone else’s money without doing their legal work properly first. Let professionals do the papers and make sure they are signed.
Don’t spend anything before you get funding
Never spend money that was promised but not delivered. Often companies receive investment commitments and expense contracts, and then the investment fails.
Do not jump to friends and family when you are in a difficult situation
Be aware that turning to friends and family for investments is not always a good idea. The worst time to run out of support from friends and family is when your business is in trouble. You risk losing friends, family, and your business all at the same time.
How do I get funding for my business?
There is one common factor that all of these businesses need to start up: money. It is critical to raise enough funds to get a small business off the ground and pave the way for longevity and future success.
Let’s take a look at some of the sure ways to get funding for a business
Most startup founders use their personal savings to fund their businesses, according to Forbes.
That said; don’t empty your bank account to raise funds for your business. Entrepreneurs should save enough living expenses (e.g. rent and food) for one year. This is because many startups are not profitable for months after opening.
2. Personal loans
This tactic is to borrow money from family and friends. To avoid hurt feelings, but the terms of the personal loan in writing. Make sure you understand how much you need, what the interest rate is, and when it will be paid back.
3. Family and friends
If you don’t have your own savings or credit cards – or you do but your growing business needs extra funding – all is not lost.
Consider inviting family and friends to invest in the company with the understanding that their money may not be returned.
In most cases, these friends and family invest in you, not your business.
In the early stages of a business, it is common for parents, siblings, or friends to support your business financially.
This option is best for companies that need some initial support to prove the concept’s success until they can apply for other funding.
Asking your friends and family for money can be a daunting prospect – but tapping the people near you before you get outside funding is often a good first step.
Before asking friends and family for money, however, you should have a business plan ready.
That way, you can explain to them exactly what you are selling, what you want to calculate, how to make money, and whether you want a loan, investment, or gift (i.e. whether or not).
Expect to get back the money they put into your business, and if so, how much).
4. Credit Cards
You can either use your personal credit card or open a business credit card. Even if this option is open to you, do not choose it lightly. Credit cards often have high-interest rates that add to your balance every month.
You could end up with much higher debt than planned, which could cripple your new business. Make sure you are using a card with the lowest interest rate and excellent repayment terms.
5. Bank loans
Traditional bank loans remain a popular source of finance for many businesses and startups. But make sure that you read up on the different types of loans, the terms, and the interest rates associated with each option.
This option is suitable for any company that has a good relationship with its bank and is able to present a convincing and well-researched business case.
Unfortunately, a small business bank loan is not guaranteed. Banks want secure business plans and excellent credit ratings before considering approving a small business loan.
You may also want to invest your own money in the company to prove that you are really committed to making your business work.
You can go to your personal bank as they are already familiar with your banking history. Or choose a bank that has always been known for providing small business lending.
6. Venture Capital and Angel Investors
Venture capital and angel investing are best suited for high-growth companies or companies that are already profitable with good cash flow.
Nevertheless, every investor has his own specialty in terms of region, industry, and company age.
Angel investors are wealthy individuals who raise funds in exchange for a stake in your business. Some investors work in groups, others alone.
These are investors who invest a significant amount of money – generally, a larger investment than an angel investor would provide – in the company in exchange for equity.
Oftentimes their goal is to help the company grow quickly so that they can get a good return on investment in a short period of time.
If you’re a start-up with high growth potential and would like to forego some equity, venture capital funding is a great way to secure both funding and mentoring.
Business angel investments are not suitable for companies that want to keep 100 percent control of their business.
7. Government programs
Government grants may take some research to find the right one for you. Fortunately, the SBA has offices across the United States that can advise you on available scholarships and provide business advice and training.
Grants.gov also provides information on over 1,000 federal funding programs. There are also small business grants that are available to entrepreneurs with particular barriers.
8. Corporate Programs
Select companies offer small business support programs, including soft finance. For example, Goldman Sachs has a program that provides affordable credit to companies that may not qualify with traditional credit sources.
9. Crowdfunding and Crowdlending
In Crowdfunding, large groups of people are usually asked for funds on special crowdfunding websites. You will usually receive a gift or the product you are developing in return for your investment.
Crowdlending works in a similar way, except that your funders expect you to pay them back. With this option, you increase the total amount of funding required online with the general public.
People can either lend you the money (peer-to-peer lending) or get a stake in your business (shares/equity). It’s best for companies with excellent growth potential that get a lot of attention and have the time – it can take a while.
10. Peer-to-Peer Lending
Peer-to-peer (P2P) lending involves borrowing money from individual investors through online P2P lending platforms rather than a traditional bank.
You publish your credit details on a P2P platform stating the desired amount and the reason for the loan. Prospective investors will review the application and agree to fund part of your loan.
Once enough people have contributed to funding your loan, the money will be given to you. You then pay a fixed monthly fee through the P2P platform, which in turn repays the investors based on the amount each one lent.
11. Incubators and Accelerators
Incubators work with new businesses, especially innovative companies that stand a good chance of destroying outdated industries. They help to lead the founder from a promising business idea to sales.
Incubators usually offer access to mentors, co-working space, a network of relevant connections, and support such as legal advice or help with intellectual property.
Accelerators work with existing companies that are small but operational. Entrepreneurs spend several weeks or months working closely with the Accelerator’s mentoring team to help them refine their business plan, avoid common pitfalls, and grow their sales quickly.
To register for an incubator or accelerator program, entrepreneurs have to go through a lengthy application process.
The requirements are different, but the entrepreneur has to demonstrate a high probability of success as the competition is often fierce.
12. Research and Development Grants
Did you know that money can be hidden in your work? R&D grants are the government’s way of rewarding innovative businesses. The grant is either in the form of direct cash or a reduction in your tax liability.
It’s a grant – free money, no repayments.
NB: The funding options discussed are all associated with risks that can destroy a company’s growth plans.
To get the most of it, business owners need to keep an eye on cash flow, forecasts, and key cash metrics like accounts receivable and accounts payable days, and gross profit margins.
Finding funding can be the hardest part of getting your business up and running, but it can also be the most rewarding.
Once you’ve saved up, got a loan approved, or found other people to invest in your business, you can go back to your dream job or start it.
While it can be a long road to success, finding allies (be they friends, angel investors, or venture capitalists) to keep your business afloat can make all the difference in the world.