12 Funding Alternatives for Startups
So you have an awesome business idea. Your well-written and detailed business plan indicate that this business will be profitable. Also, it will fill a need for millions of people. To turn your amazing idea into an actual business, you need money. One of the reasons several businesses crash within their first few years is a lack of proper financing. Money is the bloodline of a business.
With the bank’s reluctance to give loans to startups, you need to widen your net. Other sources of funding are available whether you need thousands or millions of dollars. Unfortunately, most entrepreneurs don’t know these sources. Let’s look at 12 funding alternatives for startups.
- Personal Financing
When you’re just starting out, one of the best ways to fund your business is using your own resources. This is also referred to as ‘bootstrapping’. The type of business determines whether this option is suitable. Some startups require a huge amount of capital which you might not be able to fund yourself. With is a type of investing, you typically use your savings and make several sacrifices like holidays and luxury shopping.
Personal financing has several benefits including the following:
Saves Time: Many entrepreneurs spend a lot of time in meetings with potential investors. This time could be better spent developing your business idea.
Focus on Revenue: Your focus is on making sure your business makes money because you don’t have the luxury of an investor.
Independence: You don’t work for anyone. You make all the major decisions as you see fit. Having investors is sort of like being employed again. You must keep them updated with your business operations. Some purchases may require signoffs, which is a waste of valuable time.
Leverage for More Funding: After having bootstrapped your business to profitability, investors might become interested. This gives you the opportunity for more growth. You are in the position to reject terms that you’re not happy with.
- Friends and Family
Borrowing from friends and family is another alternative. It’s best to borrow from loved ones with a high net worth. Some may offer it to you as a gift. Depending on how much it is, you will have a gift tax to consider. The interest rate is usually much lower than that of other sources. Even though this is family, make sure you document every transaction so that both parties are kept accountable.
This doesn’t come without its challenges. Whereas some families have succeeded with this type of investing, others have been destroyed by it. Consider this option carefully. You wouldn’t want to be in a position where your friends or family need the money back sooner than you can pay them. That will put a strain on your relationships.
- Angel Investors
These are typically wealthy individuals with an interest in helping entrepreneurs get their businesses off the ground. Some might be interested in taking a huge stake in your company. Others just want a sizeable return on their investment. They are usually considerate about you as the business owner and give highly valuable advice and expansion opportunities down the line.
Generally, angel investors are registered with the United States Securities and Exchange Commission (U.S SEC). To find a suitable one for your business, check out angel investor associations, go to startup events or introduce yourself to those that have been highly recommended.
- Venture Capitalists
These investors are like angel investors. However, they are interested in taking up equity in businesses that are already established and showing great potential. They are more involved and hands-on in the running of the business.
- Crowd Funding
This investing method has become popular over the past few years. An entrepreneur pitches a business to idea onto a platform accessible the public. They also set a target amount of money they will need. The public can then invest if they are sold on the pitch. Each person can donate as little as $10. If the amount doesn’t reach their target, the entrepreneur won’t access any money. The popular platforms include Indiegogo and Kickstarter.
The two types of crowdfunding are:
Reward-Based: The entrepreneur motivates contributors by offering them rewards like discounts.
Equity-Driven: This one isn’t popular yet since platforms aren’t using it.
- Micro Loans
These loans are designed to serve small businesses, especially those without credit or adequate collateral. Unlike other funding sources, these provide a small amount to help kick off businesses. To qualify for a microloan, the lender will assess your character. They will require your national identity card, financial statements and business plan among other documents.
You can pay back microloans in installments, which makes it a breeze for you to budget and plan in good time. Lenders of microloans don’t focus on your credit score and in fact, assist entrepreneurs in creating a good credit history.
The disadvantage with microloans is the high-interest rates going up to 18%. Also, these realistic loans are small (maximum $50,000) and not suitable for businesses that require a considerable amount of capital.
- Winning Contests
Startup contests have encouraged young entrepreneurs to create compelling business plans and start working on their business ideas. Usually, you are required to present your business plan in person. It’s imperative that you have researched extensively so that you can answer all the questions confidently.
Not only do you get a shot at winning the competition with a significant amount of capital, but you also get media coverage. In case you don’t win, other interested individuals or companies could contact you to get your business off the ground.
- Government Grants
You can also fund your startup with a government grant. Different grants provided by the government come with their own conditions. Check the U.S government website for grants that match the requirements of your business. These grants are free so beware of scammers. The downside is that the application is a lengthy process and it might take several weeks before you hear any feedback.
- Business Credit Cards
Business credit cards are suitable for businesses that have not yet started making money as well as those that are struggling to stay in operation. These cards are associated with an individual rather than the business. This means you should have an impressive credit score even though you have a potentially successful business. Applying for this card is not complicated and they provide immediate cash.
The rewards on this card bring considerable savings to your business. Using this card responsibly increases your business credit too. Keep in mind that non-payments will affect your personal credit and you are individually obliged to pay even though the company crashes.
Partnering with a more established business than yours could be a great alternative. Let’s say your company has created an awesome product that proves to be more efficient than similar products on the market.
Marketing this product as a startup might be risky, let alone expensive. Through a partnership/licensing agreement, the established manufacturer cuts down your marketing and supply costs by advancing your first order.
When you’re tight on cash, you could consider bartering your products or services. This method cuts across several types of businesses like dental, landscaping, bookkeeping and others. First, you need to know how much your products or services are worth so that you’re not getting a raw deal.
It’s an effective way to run on a tight budget. For example, if you’re an accountant, you could offer a building owner bookkeeping services in exchange for rent-free space.
- Equipment Financing
This type of investment is most suitable for businesses that require heavy machinery for their operations. For example, landscaping businesses, trucking companies and construction companies. As the name suggests, the lender provides a loan for the purchase of machinery. The equipment remains the property of the lender while the business makes the payment each month. Usually, the payback period is 1-5 years.
As you can see with all these alternatives, you have options. Choose the best source for your business needs. Each entrepreneur’s situation is unique. Some startups require more capital than others. While one business owner might start with their own savings, another will find that a partnership is good for their business. Whichever option you choose, we believe that when you take the necessary action, this information will help to turn your idea into an actual business.