Getting a new venture funded is one of the crucial first steps toward building a successful new business. But not surprisingly, it can be challenging, complicated, and full of twists and turns. If you know how to proceed, you’re more likely to avoid committing a costly mistake.
The first method to which most entrepreneurs turn is debt financing in the form of a traditional business loan. Examples of this tool include:
- SBA loans. Although the Small Business Administration (SBA) doesn’t grant direct loans to entrepreneurs, it provides guarantees to banks and loans so the money can be disbursed with lower risk. Known as SBA loans, they offer a number of benefits, but require mountains of paperwork in order to qualify for money.
- Business lines of credit. Much like a personal line of credit to fund expenses as they arise, business lines of credit are perfect for entrepreneurs who need flexible working capital. The interest rates can be high, but you only have to use what you need.
- Short-term loans. Do you need only a small amount of money for a specific expense? A short-term loan can give you quick cash with much fewer hoops to jump through.
Other types of business loans include term loans, invoice financing, merchant cash advances, and equipment financing. Do the necessary research to compare the pros and cons of each so you don’t overlook any options.
Obtaining financing through a bank can be difficult for small businesses. This is especially true for newer companies that lack the extensive track record and paper trail that banks look for in established companies. But in these cases, entrepreneurs can always turn towards equity financing, which takes a unique set of factors into account.
Generally speaking, business owners who (a) don’t have the credit worthiness to obtain a traditional loan, or (b) don’t want to accrue debt will give equity investments a try. A variety of equity investing options are available, including:
- Venture capital. Though this is the method of equity financing most entrepreneurs think of, it’s actually the least commonly used. In the case of venture capital, you give up a piece of your business in order to land an experienced investor who will probably expect to hold a place on your board of directors.
- Angel investors. An angel investor provides more than just money; he or she will also offer guidance, expertise, and technical/operational knowledge to the venture. So if you’re looking for some help, this is the way to go. But as startup loan provider Seek Capital explains in their review of best startup business loans of 2018, most angels want to see traction before investing (which likely means at least six months of steady growth).
- Royalty financing. With royalty financing, an investor provides up-front cash to fund business expenses. Later, your backer will expect to be paid a percentage for every unit that sells.
These types of investments do not necessarily involve interest rates and repayment terms, but they all require you to give up a portion of your business. You’ll want to think hard about this.
If your business happens to fit into a unique niche, you may be able to fund it with a grant. These unusual financing mechanisms require no repayment, interest, or equity.
This is essentially free money … though it will involve huge amounts of paperwork, a lengthy approval process, and specific directions about how the money may be used.
Literally thousands of grants are out there, though many can be hard to find. The options include: government grants, grants for veterans, grants for women, grants for minorities, and grants for nonprofits.
Because information about them can be so difficult to obtain, you may need to consult a resource such as GrantWatch to help you sift through the opportunities and identify a potential fit.
Tap Your Personal Network
Even given all the options for debt financing, equity financing, and grant options out there, some entrepreneurs still have trouble securing money they need to get the business moving.
And if push comes to shove, you shouldn’t be too proud to reach out to your personal networks, like friends and family. Research shows that 38 percent of startups are funded by friends and family.
This makes it the second most popular form of financing … after personal savings and credit.
Obviously you’ll have to approach this solution with a level of caution and poise, but asking friends and family to help fund your business may be your best option to succeed.