Researching how to fund a startup can be an arduous task. Many start the process by “bootstrapping”, which is the exact opposite of funding. It essentially means the entrepreneur uses their own savings to fund the business. There are many companies that have successfully launched using this strategy before taking on investors. For example, MailChimp and AirBnB founders both used bootstrapping to launch their ideas. Although as funding options go, bootstrapping tends to be a less-popular choice, as it generally involves more risk.
If access to cash reserves or savings is limited, we recommend these five alternatives to consider for funding a startup:
This is one of the newer ways to secure funding and it has recently taken the entrepreneurial world by storm. Popular platforms like kickstarter or Indiegogo are great examples of websites that allow users to create crowdfunding campaigns.
Here’s how it works: an entrepreneur will post a detailed description of his/her business on the platform of choice along with the goals of the business, future financial strategies for turning a profit, the target audience, how much funding they require and the reasons. Anyone can contribute money toward helping a business that they believe in. Generally, those giving money will make online pledges with the promise of pre-buying the product or service. While there are many advantages to this tactic, competition is widespread, so startups need to make an idea stand out from the crowd in order to attract the crowd.
Venture Capitalist Funding
Venture capitalists specifically look for startups to fund. For many businesses this option is ideal, as venture capitalists have a lot of money at their disposal and plenty of resources readily available to help companies succeed. On the flipside, the business owner can end up giving away a considerable percentage of the company, and the underwriting and funding process can take longer than anticipated.
Angel Investor Funding
Angel investors work similarly to venture capitalists except their operations are much smaller, sometimes only one person. Like venture capitalists, angel investors will often want a large portion of your company, e.g. owning 49 percent of your company is not unheard of with an angel investor.
If you have excellent credit history you may be able to use it to establish a line of credit to help fund your startup. There are specific credit cards designed for entrepreneurs, so visit your bank to learn about the options that may be available. While a line of credit is a way to access funds quickly, it can have a negative impact on your personal credit, especially if you find yourself unable to make timely payments.
Factoring is one of the oldest forms of financing. Factors offer lines of credit like a bank, except a factor will underwrite the credit quality of the company’s customers, not the company. Everything comes at a price when it involves financing a startup, and factors will need to see a return on their investment. They charge a fee instead of an interest rate, and you can expect it to be comparable to a cash discount. One of the major benefits of factoring is funds can be available within five to 10 business days of receiving your application. Factors are lenders who don’t require equity and they can grow your credit limit as your business grows.
While any one of these options will traditionally lead to secured funding, we encourage you to continue working on your idea, even if you don’t initially succeed in getting the monies needed. If you’ve exhausted all of these avenues, it may be worth pitching your idea to friends and family, but remember nothing kills a relationship like money so give it serious consideration first.
Entrepreneurs are typically thick-skinned individuals who are accustomed to having the door shut in their faces many times before getting a positive response. If an idea is a good one, and it’s marketable, through hard work and perseverance, funding will be attainable, and the business should come to fruition.