When you’re starting a business, it’s not enough to have just an idea; you must also have the research and the funding to back it up.
With so many decisions to make, it can be overwhelming to narrow down how you’ll get the proper funding for your startup. Thankfully, there are numerous financing options available to you as a new entrepreneur.
[Read: Financing Strategies for Every Stage of Your Business]
Financing options for startups
Traditional lenders
Banks and other financial institutions used to be the only resources from which aspiring business owners could obtain a loan. These are known as traditional lenders. Because these lenders have been around so long, they have more exclusivity on who they choose to give their money to. Therefore, potential loans typically go through a stringent application process and rely on potentially limiting factors such as the age of your business and a strong credit score.
Venture capitalists
Venture capitalists (VCs) are entities that take part ownership of a business for capital, typically your business’s liquid assets. They don’t require you to have a physical lien and are a good alternative to a financial institution. They also allow for strong networking opportunities and mentorship. There are many different types of VCs, however, the two that relate most to startups are:
- Seed capital: This stage is when your business is still in the idea phase. It’s atypical for investors to invest heavily in this stage. However, any funds you do receive can assist you in providing a solid foundation and early product development for future investors.
- Startup capital: The startup stage is when you have a semi-functioning business with a full-time manager and a solid first version of your product. The VC can take your business to the next level by bringing your startup to the marketplace.
Angel investors
Angel investors are similar to VCs with the main difference being that they are willing to invest in a business that may not have strong potential. Additionally, an angel investor is usually an individual rather than a larger, established company. Angel investors typically invest in your business because they believe in the values and mission on which your business is founded. It helps to have a strong relationship with someone who is familiar with the vision you have for your business and can assist in planning its future.
Popular crowdfunding sites like Kickstarter and Indiegogo are relatively low-risk for business owners, but keep in mind that you may not receive your funds if you don’t reach your established fundraising goal.
Invoice financing
Invoice financing, also known as factoring, is when a business borrows money against what customers owe the business. This way, cash is continuing to flow towards the business while waiting for customers to pay their outstanding bills. This allows you to continue your business efforts while receiving funding at the same time, knowing repayment is secure.
Crowdfunding
Crowdfunding is when your business receives funds from multiple investors known as "crowdfunders." They typically don’t receive any ownership in the business (unless you use an equity crowdfunding platform) and don’t expect any capital in return for their donation. However, they do often receive a small perk or free product from the business based on their donation amount. Popular crowdfunding sites like Kickstarter and Indiegogo are relatively low-risk for business owners, but keep in mind that you may not receive your funds if you don’t reach your established fundraising goal.
[Read: 6 Crowdfunding Mistakes to Avoid]
Peer-to-peer lending
Peer-to-peer (P2P) lending allows borrowers to secure loans from lenders without the assistance of a financial institution. This usually happens through P2P lending websites such as Upstart, Lending Club and Prosper. This form of funding can be seen as a cross between crowdfunding and marketplace lending.
Finding the right business financing option for you
Searching for the correct funding options for your business is a time-consuming process and can turn into a full-time commitment. You must ensure you’re talking to the correct investors and utilizing the methods that work best for your business.
It’s important to have a strong and convincing pitch that investors, crowdfunders and venture capitalists are willing to hear and believe in. It helps to partner with your current connections and ask for “warm introductions” to investors they know. This will build your network and allow potential investors to gain confidence in your product.
[Read: How to Fund Your Business]
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