No matter how terrific your idea or service is, your business won’t get off the ground without adequate funding. Business startup costs can vary, but it’s fairly safe to say that you will always need more capital than you think. Forging relationships with financial institutions or investors who might come to your aid as your business grows might forego some sleepless nights.
But where do you get your initial capital? In addition to the usual suspects, there are other funding resources available to business owners. Below are nine of the best sources of capital for your business.
1. Angel Investors
Typically, Angel Investors invest early and therefore expect equity compensation for their investment. This means, in exchange for the capital they want to invest, the business owner will offer them a percentage of the company and revenue. Angel Investors normally have larger amounts of capital to invest. But trading money for a stake in your business isn’t always an attractive option. Many Angel Investors seek at least a 10 percent stake in your business. After a few rounds with more than one investor, this can easily leave you, the business owner, with very little direct ownership. Additionally, when Angel Investors are ready to sell back their percentage in the company, they may look for a larger-than-average buyout that could hurt your revenue stream. That being said, they can sometimes be the best option for those seeking a decent influx of capital without the expectation of paying the money back if the business fails.
2. Venture Capital
Venture capital is usually provided to startup businesses that show good long-term growth potential by a group of investors that pool together resources. In exchange for an infusion of capital, business owners must usually give venture capitalists a say in how their business is run in addition to equity. If it sounds like a lot to ask for, that’s because it is. That’s because venture capitalists have no guarantee if your businesses succeeds or doesn’t.
3. Bank Loans
Bank loans are a very common source of funding with many different options that can suit your needs. However, there are drawbacks to bank loans, including the need to generate a consistent cash flow to cover the interest payments. They can also be difficult to secure depending on your previous financial history. Banks will review many factors when evaluating your ability to secure and pay back a loan, including your credit history, cash flow history, projections for your business, your available collateral and your business’ credit history, just to name a few.
4. Government Loans
There are many sources of funding available to small businesses at the federal and state level.
- SBA 7(a) Loans are federally sponsored debt-financing programs and are the most popular option. The high number of banks that offer this loan gives you many options for finding a competitive interest rate, so it’s best to shop around.
- Local and State Economic Development Organizations, which will vary in availability from state to state, can charge really low interest rates in cooperation with bank loans. These groups may not be able to finance your entire operation, but it may make securing the additional funding you need easier. A very good resource for these types of organizations is your local chamber of commerce.
- In addition to the Small Business Administration, many other government agencies offer loans to businesses, especially those owned by individuals from historically disadvantaged groups.
If your current or future business operates in certain industries, such as research or green technology, you might be able to apply for various grant opportunities. Be sure to read the terms of compliance, however, so that you don’t spend resources preparing an application for a grant you don’t qualify for.
- Small Business Innovation Research (SBIR) Grants – The application is intense, but an SBIR Grant can be a great way to turn your intellectual property into business capital.
- The U.S. Department of Agriculture gives grants to small business for those working on rural energy projects. Two such examples are the Rural Energy for America Program (links directly to PDF) and the High Energy Cost Grant.
- If an SBA or USDA grant isn’t what you’re looking for, there are a host of other grants offered by other government and private interests.
Depending on your product or service, partnering with a vendor or supplier might give you an injection of capital that you need to start. Most vendor agreements take the form of "trade credit," commonly called "terms," allowing you to take delivery of goods without paying for a set number of days. Also, because the financial relationship is mutually beneficial, you often don’t need to share equity or revenue with your vendors. Requirements and terms will vary, and most vendors might a long purchase history before extending trade credit to your business.
The rise of crowdfunding websites, like Kickstarter, makes it possible for your current and future customers to be part of growth of your business. If your service or product is attractive or unique enough, customers will be eager to be a part of it. If you do not wish to use Kickstarter, there are alternatives like indiegogo, RocketHub, GoGetFunded and FundRazr. Each of these platforms offer different benefits and fundraising management options, so its important to spend some time on the front end evaluating which one is right for you and your needs.
8. Personal Savings and Assets
If you can’t get the necessary cash from outside, why not generate some of your own? In addition to checking and savings accounts, you might consider using a credit card, or even tapping into your retirement investments. But only do so if you are confident that you will be able to comfortably pay it back.
For example, let’s say you own a corner retail store, and your only refrigerator dies. You’ve owned it for over a decade, and it would be better to buy a new one outright instead of fixing the existing one. In this case, maxing out a credit card to finance the purchase might not be a bad idea, as the new refrigerator will likely generate revenue that you can use to pay down your credit card debt. Just be sure that you can do it before you make the commitment.
9. Friends and Family
It might not be the most glamorous and it might not work for some, but asking for funding from family and/or friends can be expedient. There may be no terms attached like a bank loan, and you might not be required to pay back your family or friends for a long time.
Before you attempt to borrow money from them, however, consider the consequences if your business goes sour, and you can’t pay the loan back. Bad business deals have torn friends and family apart. While there are legal measures to deal with the consequences of a bad loan, there isn’t anything like bankruptcy court to deal with a lost friendship.
Generating and managing the capital for your business is key to early and ongoing success. Using one or a combination of these methods will help you fund your endeavors now and in the future.