You’ve conceived your product idea, written a business plan, and honed your sales-pitch to a tee. But now you need funding to get your company off the ground. So, where do you go?
While last year saw a record level of investment in startup businesses, it’s not always obvious to a budding entrepreneur which type of financing is best suited for their fledgling company’s needs. With a bewildering array of options at their fingertips, selecting the right kind of financing is an increasingly difficult task.
Here’s a list of the top five ways to fund your business idea:
A venture capital company is a large, professional team of investors who specifically look to invest in promising startups. They have access to large amounts of capital, and are experts in all areas of business development.
The sheer number of resources and expertise available to a venture capitalist firm make it one of the most attractive options for many startups, especially those who operate in industries with complex regulatory frameworks, or who will need access to extensive marketing or pre-existing sales networks.
However, there is one major drawback with VC funding: you will almost definitely have to give up some control, and a considerable slice of your equity, to a venture capitalist who agrees to invest in your business. So, if you are not comfortable with compromise and overt mentorship, this route might not be for you.
It isn’t an overstatement to say that crowdfunding has revolutionized the way in which small, and increasingly large, businesses go about funding their big ideas. Online platforms like GoFundMe and Kickstarter are popular examples of sites where literally anyone with an idea can pitch it to backers for funding.
The concept is simple: an entrepreneur shares their business pitch on the site, and if they like it, funders or backers, can choose to invest as little or as much capital into the idea as they want. Incentives for investment are often tailored to reflect the product or kind of business being funded – early investors often get a discount when the product comes to market, or even free units of initial prototypes.
Although crowdfunding is seen as a relatively cost-effect and risk-free way to finance a new startup, many ideas often go unfunded. It is also an increasingly competitive arena in which to get funding. As startup entrepreneur, Drew Hendricks says, “The most successful campaigns seem to come with a good story. While most entrepreneurs are inclined to highlight the product and hide in the background, on crowdfunding sites, the entrepreneur is the story.”
Like crowdfunding, government and local authority grants can make for a highly sought-after and low-risk source of funding. Meant to encourage the creation of new businesses, grants, such as those from UK-based Prince’s Trust, help young entrepreneurs tackle financial barriers to starting a business.
In the U.S. “state and local programs, non-profit organizations and other groups [offer grants] … that are not necessarily free money, and usually require the recipient to match funds or combine the grant with other forms of financing” (SBA.gov). However, finding a grant suitable to your needs, and completing the complex application procedure, can be a time-consuming process, and is not always an option for every business.
Friends and Family
Moral support from family members and those close to you can offer a huge business boost. Support can also come in the way of financial aid too. Borrowing money from family and friends often means getting the most favorable lending terms, and there’s also room for more flexibility than you’d find with a commercial lender or financial institution.
But be careful: friendly financial deals gone wrong can lead to relationship breakdown and spell legal trouble down the line. Make sure the terms of any transaction are agreed in full (and in writing) beforehand, and ensure expectations of profit or loss are disclosed upfront.
Although it probably doesn’t appear as attractive as other options right away, foregoing any investment into your business might very well be the most profitable move in the long term.
The success of a business can come down to some very tight margins. Interest paid on bank loans, or the loss of equity from venture capital funding, could mean ultimately that your company fails. Instead, tapping into your personal savings, credit and reinvesting a greater portion of your sales back into the business may be a more favorable option to spur initial growth.
Funding your startup shouldn’t be an anxiety driven ordeal. Spend some time forming a solid business plan, find ways to support a lean launch, get creative and take steps to put your business in the best financial position to win.
This article has been edited and condensed.
Simon Crompton is an entrepreneur running several online businesses. Currently focusing on his marketing firm, Threecolors.blue, he is also a trained journalist sharing his knowledge via several internet blogs. In his spare time he’s an avid programmer and videographer. Connect with @PermanentStle on Twitter.
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