How To Get Startup Funding For A Small Business

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Think critically about your business and which funding options make the most sense.

Most startups begin with early seed funding from friends and family, angel investors or accelerators.

The best way to succeed is to find suitable financing for your small business.

It is advisable to look for funding well before your business will need it.

When you have a great business idea, how can you raise the money to get it started?

Finding an investor for a small startup business is harder than ever. How can you get your business off the ground?

Trying to find financing for your startup is at the heart of any business's success.

You can take important steps toward funding your small business. Make no mistake; it will be difficult.

The key to obtaining funding as a startup is to partner with companies that provide added value to your business.

A legal consultant or PR company, may be able to help you find funding.

Building a network of support is the best way to give your business the support it needs.

This is how startups can differentiate themselves from their peers. Find the right financing investor for the stage your business is in.

How To Finance A Business Startup

As a startup, funding rejection comes as part of the journey. Maintain low expectations so rejection doesn't overwhelm you.

See rejection as part of the financing process. Everything is a work in progress. Raising money from people is a very difficult thing.

No matter how great your business idea is, can you get sufficient funding to start and grow the business?

Raising startup funding is never easy, and usually takes longer than anticipated.

Diversify your sources of financing to better weather potential downturns.

It will also improve your chances of getting appropriate funding to meet your specific startup business needs.

Lack of funding is the main reason why over 94% of new businesses fail during first year of operation.

Money is the bloodline of any business. Whichever source of funding you opt for, will have specific advantages and disadvantages.

Getting startup capital takes planning and effort.

You must weigh the benefits and downsides of each funding option to find the right fit for your small business.

Don’t be afraid to mix and match multiple funding sources.

Alternative Lenders

This is a quick way to obtain funding for your small startup business.

A financial provider can extend a lump-sum amount of financing and then buys the rights to a portion of your credit and debit card sales.

Cash advances can be very expensive and affects your business cash flow.

Avoiding the traditional bank loan route might seem like an impossible feat.

What do you do when your startup business can’t qualify for a bank loan?

If you can't qualify for a small business loan, only then should you consider alternative lending.

You need to think outside the box when looking for financing for a startup business.

Don’t be afraid to consider alternative lending options.

Nonprofit lenders offering microloan programs may be the right choice for your business.

Whatever option you choose, be prepared and do your research when looking to borrow.

Be realistic with your small business and your ability to repay the loan.

Keep your motivation for starting the business in mind.

Finding and being approved for a startup business financing is not easy.

Having a good motivation and the right business structure can make it easier.

Convertible Debt

Convertible debt is when a business borrows money from an investor and the collective agreement is to convert the debt to equity in the future.

The investors are guaranteed a set rate of return per year until a set date. Convertible debt doesn't put a strain on business cash flow.

Interest payments are usually accrued during the term of the bond.

This can be a great way to finance a startup and a small business.

You have to be comfortable with giving up some equity in your business to an investor.

Bank Loans

Bank loans are the most common source of funding for small and medium-sized businesses.

Banks look for companies with a sound track record and excellent credit.

A good idea has to be backed up with a solid business plan.

Start-up loans also require a personal guarantee from the business owner.

Financing a startup or small business can be a difficult.

If you have a bad credit score and no collateral, consider an alternative loan.

The more you borrow, the more time and pressure you put on your business to generate revenue.

You need to know what the lender will be looking for.

A business owner with bad credit will find it tough to qualify for almost any bank loan.

You don’t want your urgent business operations to be put on hold while you wait for loan approval.

Product Pre-Orders

Selling your products before launching is an effective way to raise money for a startup business.

It is also a great way to improve cash flow, and prepare your business for consumer demand.

Retirement Account

Rather than withdrawing money from your retirement account, you can borrow against some employer-sponsored retirement accounts, such as 401(k) and 403(b).

Contact your 401(k) plan administrator to ask about loans.

The loans secured against your retirement funds, offer low interest rates.

They are the most affordable option for small-business owners.

Borrowing from your retirement plan could have consequences if you don’t pay back on time.

You may be able to withdraw funds from your retirement plans, to shift retirement funds to your business.

Keep in mind that it may not be wise to invest your whole retirement savings in the startup or small business.

Credit Cards

Credit cards offer immense flexibility. You can withdraw up to your credit limit.

Then you can pay it back on your own schedule.

No bank applications for business loans, or lengthy waiting period.

You can access the money immediately.

Use low-APR credit cards to minimize your interest.

A number of credit card issuers specifically cater to the small business market.

Many come with special benefits: cash back rewards, airline mileage points, and other perks.

The credit limits of a small business card can be substantially higher than traditional credit cards.

Some issuers require that the card be tied to the owner’s personal credit score and a guarantee from the owner.

To qualify you for a business credit card, issuers will generally look at your personal credit scores and combined income (personal and business).

While they may not require collateral, they typically require a personal guarantee.

They can help you get your small business running and establish business credit.

Any defaults or late payments on the business credit card would affect your personal credit rating.

Interest on unpaid balances on the credit card can be quite high, ranging from 5% to 19.9%.

A good tip would be to choose a card with a 0% introductory rate offer.

Keep a close eye on your credit use and pay your bills on time.

Putting business expenses on personal credit cards can hurt your personal credit scores.

Business credit cards can be a great alternative to start up business financing.

Home Equity

If you own a home with equity in it, you can open a home equity line of credit or HELOC.

These rotating credit lines are secured with a lien against your home.

They have lower interest rates and upfront fees. If you default, you lose your home.

Alternatively, you can borrow a home equity loan or you can refinance your existing mortgage.

Pulling equity from your home tends not to be a cost-effective way to finance your startup business.

Borrowing against your home equity is a cheap but very risky option.

Equipment Financing

Small businesses can buy equipment through an equipment loan.

This requires a down payment of 20% of the purchase price of the equipment.

The loan is secured against the equipment itself.

Interest on the loan is typically paid monthly.

The principal is usually amortized over a 2 to 4 year period.

Equipment financing is specifically designed to pay for the purchase of equipment and machinery.

The lending standards can be less strict because your equipment will be used as collateral for the loan.

If you default, the bank has the right to seize your equipment to cover the cost of the loan.

Equipment leasing is another option that you should consider.

Keep in mind that many different assets you use in your business may be leased.

Equipment loans can also sometimes be structured as equipment leases.

Venture Capital

Venture capital is not necessarily for all entrepreneurs.

Venture capitalists look for technology-driven businesses and companies with high-growth potential in sectors such as information technology, communications and biotechnology.

They take an equity position in the company to help it carry out a promising but higher risk project.

Venture capital financing involves giving up some ownership or equity in your business to an external party.

Venture capitalists also expect a healthy return on their investment.

Look for investors who bring relevant experience and knowledge to your business.

The guidance from an experienced investor group is the best thing for your startup business.

The relationship you establish with a VC can provide an abundance of knowledge, industry connections, and a clear direction for your business.

Venture capital investment may be appropriate for small businesses that are beyond the startup phase and already generating revenues.

They tend to be highly selective and usually invest only in established businesses that generate profits.

They generally look for startups that show potential for explosive growth.

These firms invest in a business with the hope of cashing out their equity stake through initial public offering (IPO), or selling out to a larger existing business.

Venture capital can provide funding, strategic assistance, introductions to potential customers, partners, and employees.

Venture capital financing is not easy to get.

Before approaching a venture capitalist, try to learn whether their focus aligns with your business and its stage of development.

A startup must have a good “elevator pitch” and a strong investor pitch deck.

The best way to get the attention of a VC is to have a warm introduction through one of their trusted colleagues.

Startups should also understand that the venture process can be very time consuming.

21 Ways To Get Startup Funding For A Small Business

Below are some of the different sources of financing for a startup business.

Contribution From Friends And Family

Borrowing money from friends and family is a classic way to start a business.

Your family and friends often believe in your dream.

They may be more willing to help fund your company. It is a good idea to make sure that each of you gets sound legal advice, if you are taking the money as a loan.

Give your would-be sponsor the respect of a formal, prepared presentation.

Despite the personal relationship, however, don’t just ask for money.

Prepare your business plan, financials, and all other documentation.

Invite their feedback and advice about your business plan.

Never assume that even close friends or family will lend you money.

Don’t take their financial support for granted because you have a relationship with them.

Many businesses have been funded with the help of family members.

This is one of the biggest sources of startup capital available to early-stage startup businesses.

Small Business Loans

Some banks offer loans to small businesses. It can be difficult to qualify for small business loans.

The SBA doesn’t lend directly to small businesses.

Instead, it offers a variety of guarantee programs for loans made by qualifying banks, credit unions, and nonprofit lenders.

Ask around among banks and credit unions about available SBA loan programs.

The SBA program allows small businesses to get loans up to $5 million.

Businesses that qualify for a 7(a) loan must comply with SBA standards.

The SBA also does not back loans to businesses that have previously reneged on any other government loans.

Other restrictions also apply. Interest rates on 7(a) loans depend on the lender, the size of the loan, and the borrower’s credit history.

There are no fees on 7(a) loans less than $150,000.

For loans greater than $150,000 that mature in one year or less, the SBA charges a fee of 0.25% of the portion of the loan it guarantees.

Lenders are more likely to offer SBA loans to existing businesses with several years of financial paperwork to demonstrate their viability.

Individual lenders are approved by the SBA to make loans under SBA programs. Getting an SBA loan is not fast or easy.

There are a number of qualifications required, including acceptable credit.

There is no minimum personal credit score required.

Because the terms are favorable, it is a financing option worth exploring.

The interest rate and repayment terms are more favorable than most loans.

Loan amounts range from $30,000 to as high as $5 million.

However, the loan process is time consuming with strict requirements for eligible small businesses.

Partner Financing

Partner financing is a good alternative because the company you partner with is usually going to be a large business in a similar industry.

Partner funding acts like venture capital and can also be royalty-based.

Trading services or equity can be an awful way to make a living, and so not everyone is willing to do it.

Don’t be offended if your partner says no way. Some small business owners offer equity in their startup company to attract funding.

Before offering equity in your business, make sure you understand the options and the players involved.

Bootstrapping Your Startup Business

Bootstrapping is an effective way of startup financing. Startups often have trouble getting funding without showing some traction, and a plan for potential success.

You can invest from your own savings, or can get your family and friends to contribute.

Bootstrapping is about stretching resources. Financing will be easy to raise due to less formalities and low costs.

When you have your own money, you are tied to business. Investors consider this as a good point.

But this is suitable only if the initial investment is small.

Bootstrapping is one of the most common ways to get a business up and running.

Businesses that need money right from the first day, are not good for bootstrapping.

Basically, you use your own funds to run your business.

Business Incubators And Accelerators

Business incubators and accelerators generally focus on the high-tech sector, by providing support for new businesses in various stages of development.

However, there are also local economic development incubators, focusing on job creation, revitalization and hosting and sharing services.

Incubators invite future businesses and other fledgling companies to share their premises, administrative, logistical and technical resources.

The incubation phase can last up to two years. Once the product is ready, the business usually leaves the incubator's premises to enter industrial production phase on its own.

Businesses that receive this kind of support include biotechnology, information technology, multimedia, or industrial technology firms.

Early stage businesses can consider incubator and accelerator programs as a funding option.

These programs assist hundreds of startup businesses every year.

These programs normally run for 4-8 months and require time commitment from the business owners.

You will be able to make good connections with mentors, investors and other fellow startups.

They help take the startup business from a promising business idea to earning revenue.

Many incubators are backed by venture capital firms.

Accelerators work with existing companies that are small but operational.

Often accelerators provide seed money in exchange for an equity stake in the business.

To enroll in an incubator or accelerator program, startups must complete a lengthy application process.

Requirements differ, and the competition is often fierce.

Crowd Funding

Crowd funding on social platforms can give a financial boost to small businesses.

These platforms allow businesses to pool small investments from several investors.

You can raise the necessary seed funds to get your startup through the development phase.

Some platforms have payment-processing fees or require businesses to raise their full financial goal to keep any of the money raised.

It is important to read the fine print of different social crowd funding platforms before joining.

Crowd funding is like taking a loan, pre-order, contribution, or investments from many people at the same time.

Those giving money will make online pledges with the promise of pre-buying the product, or giving a donation.

Anyone can contribute money toward helping a business that they really believe in.

Crowd funding can also generate interest and help in marketing a product.

It is a competitive place to earn funding. The key to successful crowd funding campaigns is to have a compelling story about your product, service, or company.

Offer a meaningful reward for donations. Crowd funding platforms charge fees for listing fundraising campaigns.

Some of the most popular crowd funding sites include:

  • Indiegogo,

  • Kickstarter,

  • Crowd Supply,

  • SeedInvest,

  • Crowdfunder,

  • Crowdcube,

  • Fundly,

  • GoFundMe,

  • iFundWomen.

Government And Small Business Grants

The SBA as well as other organizations sometimes offer grants to small businesses that are run by women, minorities, or veterans.

Contact your local SBA chapter, or Chamber of Commerce. Ask if there is local grant money that you may be able to apply for.

Check to make sure you will not need to pay back the money.

Not all grants have stipulations, but it’s good to know what you’re agreeing to before accepting the funds.

Government agencies also provide grants and subsidies that may be available to your small business.

There may be strong competition, and the criteria for awards are often stringent.

Most grants require you to match the funds you are being given.

For instance, a research grant may require you to fund only 40% of the total cost.

If you comply with the eligibility criteria, government grants could be a good funding option for your small startup business.

Local Contests

Local contests are also a great way to practice your pitch for other investors.

You won’t lose anything but time for trying. And even if you’re not the winner, you gain exposure for your business.

Contests help to maximize the opportunities for fund raising. It encourages startups with business ideas to set up their own businesses.

Winning local contests can get your business some media coverage.

You either have to build a product, or prepare a business plan.

You need to make your project stand out in order to improve your chances of success.

You can either present your idea in person, or pitch it through a business plan.

Your idea proposal should be comprehensive and worth investing in.

Personal Investment

When starting a business, the initial investment should be your own cash, savings or assets.

Don’t be in a hurry to quit your day job, and follow your business dreams.

Spend some time getting the business off the ground with fewer compromises.

Stay true to your vision without needing to give in to financial pressure.

Look for ways to start your business on the side of your full-time job.

Just because you don’t have enough money in your savings account, doesn’t mean you can’t fund your business.

Brainstorm assets you could sell to raise money. You can also sell financial assets such as stocks, bonds, real estate, high-end electronics, or other valuables.

While you may incur capital gains taxes, you also have plenty of ways to reduce or avoid them.

Peer-To-Peer Loans

Peer-to-peer (P2P) lending can be a financing alternative for small businesses in need of startup money.

It is a hybrid of crowd funding and marketplace lending. P2P lending is only available to investors in certain states.

This type of lending offers some advantages over traditional bank loans.

Borrowers can sometimes score lower interest rates, fewer fees, and greater flexibility.

Your credit score still matters, and affects both your interest rate and loan amount.

The basics of lending still apply. If you default, it does hurt your credit.

These lending platforms report your payments to the credit bureaus as well.

These lenders can make decisions relatively quickly.

Invoice Financing

With invoice financing, a service provider fronts you the money on your outstanding accounts receivable, and you repay once the customer settles the bill.

Your business gets the cash flow it needs to keep running, while you wait for customers to pay their outstanding invoices.

Invoice financing allow companies to close the pay gap between billed work and payments to suppliers and contractors.

By having a steady cash flow, businesses can accept new projects more quickly.

If you get paid by your customers via invoices, this is a convenient way to avoid cash flow issues.

You can get your financing in as little as a day with less paperwork.

Angel Investors

An angel investor is an individual who is more likely to invest in a startup or early-stage business that may not have the demonstrable growth a VC would want.

Angels are generally wealthy individuals, or retired company executives who invest directly in small firms.

To find an angel investor, you have to contact specialized associations or search websites on angels.

Angel investors also work in groups of networks to collectively screen the business proposals before investing.

They can also offer mentoring or advice alongside funding.

They prefer to take more risks in investment for higher returns.

Some angel investors can also leverage their existing contacts within an industry to open doors for your business.

Angels tend to keep a low profile. The best way to find an angel investor is through a solid introduction from a colleague or friend of an angel.

They are often leaders in their own field who contribute their experience, network of contacts, technical and management knowledge.

If you want to go the angel investor route, practice your pitch until you’ve perfected it.

You need to make clear why your service or product will be a hit with consumers.

Angel investors are much more likely to invest in your startup if they know your sector well.