One of the biggest challenges that every entrepreneur has to face is finding funding for their small startup. No matter how brilliant an idea is, it’ll never go anywhere without the financial backing to set things in motion. From paying for labor to renting office space, money is needed to turn a great business idea into a viable operation.
But unless the entrepreneur in question is already wealthy or was bequeathed a large reserve fund from a generous family member, they’re going to have to work hard to acquire funding. Thankfully, there are plenty of ways to come by some startup capital. Below are some excellent strategies to consider when trying to find funding for a small business.
One of the most common ways entrepreneurs receive financing for their business is by taking out a business loan either from a bank or an alternative lender. There are different types to choose from, such as working capital loans, small business loans (SBA), microloans, friends and family loans, and car title loans. All that’s needed to apply for any of these loans are updated income and financial statements, detailed business plans, bank account details, and tax returns.
While this is one of the easiest ways to acquire funding, it’s still quite risky considering the business actually has to succeed and turn a profit in order to pay back the loan. It’s important to have a well-designed business plan to ensure that the business thrives without any difficulties, particularly during the first few years of its operation.
Product pre-sales are when a small business owner sells their product before its formal launch. The profits received from these sales all go towards funding the business. This is also a great way to build up a small following and generate buzz for the product before it officially goes to the market.
Crowdfunding helps entrepreneurs generate capital to fund a small business idea, personal project, or creative endeavor through the accumulation of donations from individuals — from friends and family to venture capitalists. This is usually done through crowdfunding websites like Kickstarter, Indiegogo, Fundable, and Rockethub. A small cut of the total amount raised is usually taken by these crowdfunding websites though, so many people have also taken to social media to garner financial support while avoiding any service fees.
Business Accelerators and Incubators
Business accelerators and accelerators both provide resources, guidance, and financial support for small startup businesses, but they also differ in a number of ways. Accelerators are usually much shorter and more intensive than incubators. This is because these programs intend to immediately turn business ideas into viable operations and products in a short span of time. On the other hand, incubators don’t have set deadlines and allow startups to expand at its own pace.
Angel investors are wealthy individuals who are always looking for the next big startup to invest in. Once they lend money to a small business owner for startup capital, they become automatically eligible to own a share of that company. Some of the most renowned tech companies in the market today — such as Google, Paypal, Amazon, and Yahoo! — have been financed by angel investors.
There are plenty of competitions and contests that pay a large sum of money for interesting business ideas. Not only will the winning idea be awarded a cash prize, but they also receive some media coverage for participating to give them a leg up, especially if the sponsors of the contests are established companies. All that’s usually needed to participate is a comprehensive and well-designed business plan and a good pitch presentation.
While this isn’t necessarily a long-term solution for business financing, it gives aspiring entrepreneurs an opportunity to get their foot in the door when it comes to connections and publicity, and the amount of money usually awarded isn’t something to sneeze at. Small business owners are looking at a cash prize of $100,000 at the minimum.
Venture capitalists (VCs) work in the same way as angel investors, except VCs usually pool money from large corporations, investment companies, and pension funds, whereas angel investors use their own wealth to invest in startups. For this reason, VCs are capable of investing more money, but they also expect larger returns on their investment.
These are just some of the most effective ways to fund a small startup business. It’s helpful to mix and match several financing options to ensure that the business isn’t putting all its eggs in one basket. Other ways to supplement these strategies is by self-financing through selling assets, tapping into a 401(k), and using a credit line.