Every year in the U.S., thousands of budding entrepreneurs develop attractive business ideas but lack the necessary funds to turn their dream into a reality. Obtaining funding for a first-time entrepreneur can seem like a daunting task, especially if you don’t know where to start. However, there are many options available for business owners seeking financial assistance. Essentially, businesses can raise funds through debt, equity, or some mixture of the two. Debt financing entails borrowing money from a bank or other lending institution, where the company must repay the principal amount plus interest. Alternatively, equity investors are willing to inject a substantial portion of money into the business in exchange for some share in ownership. While both are viable means of obtaining funds, financing will depend on the type of business you are pursuing and what you qualify for. For example, owners may use their savings (equity) and also request a loan (debt) to meet their immediate business needs.
Starting a company is not a simple task, from idea generation to securing suppliers, developing your product, through to marketing and sales, says Robert Beebe, president of Fundmerica, which helps small businesses obtain the funds they need. Fundmerica presents eight different paths you may want to explore to secure financing for your start-up.
Self-fund as much as you can
While this may not be an option for everyone, “bootstrapping” refers to financing the business out of one’s own pocket. As many as 82% of start-ups are self-funded. If you don’t have sufficient savings to quit your job and focus solely on your own business, you may want to launch your start-up as a side-project. As a result, you can use the salary earned from your nine-to-five to fund your start-up. At a minimum, you will be able to jump-start the business and prove its viability before approaching investors. Arguably, the chief advantage of bootstrapping is being able to retain all profits while staying in control of your company.
Find a strategic business partner
First of all, you should have a detailed business plan in place, say experts from Fundmerica. According to a study by Harvard Business Review, entrepreneurs who make formal plans are 16% more likely to be successful. Your business proposal should take into account your company’s mission, values, day-to-day operations, and financial analysis. A well-prepared business plan can prove to potential business partners, lenders, and investors that your business is worth supporting. If you manage to induce enough interest to secure a partner, they may already have the capital needed to get the business up and running. Consequently, if you know anyone that is business savvy and just as passionate as you are about the project, consider getting him or her on board.
Reach out to family and friends
Family and friends are our biggest supporters. If bootstrapping is completely out of the question, seeking financial assistance from loved ones can produce many benefits. For instance, they may lend you the money at a lower rate of interest, no interest, or request a smaller portion of equity for their investment. Some entrepreneurs claim that financial help from loved ones motivates them to work harder to ensure they can return the borrowed funds and avoid disappointment. In some rare cases, parents, grandparents, or a wealthy relative will gift the money required to help get the business off the ground.
Join a crowdfunding platform
Crowdfunding has become an increasingly popular method of obtaining business financing. Crowdfunding gives you access to small sums of money from a large group of people who are interested in seeing your business idea come to life. To set up a crowdfunding campaign, you will be asked to set a monetary goal and a time frame for which you would like to achieve it. Some sites are designed to allow users to keep the funds raised even if their goal is not met, while others will return the money to contributors. To solicit the funds needed, says Robert Beebe of Fundmerica, you will need to prepare a catchy elevator pitch that conveys the value of your business. If this option appeals to you, you may want to check out some of the highest-rated crowdfunding sites, such as Kickstarter, Indiegogo, and GoFundMe.
Request a loan or line of credit
Another option available to you is visiting your local bank and requesting a business loan. During your meeting with the loan officer, you will present your business plan, request a sum of money, and explain how the funds will be used. Banks typically look at specific criteria when deciding whether or not to approve your loan, including the age of your business, your credit rating, and if you have sufficient collateral. In the event that you do not qualify for a business loan, you can always apply for a line of credit or try an alternative lender. If the bank approves you for a line of credit, you will be given a spending limit that can be used in any area of the business. Fortunately, you only pay interest on the amount of credit used, and on-time payments will help build your business’ credit score. Alternative lenders have become very attractive for start-ups in recent years, as the odds of getting funded are much higher and there is a shorter waiting period for approval. For example, many Americans have turned to Fundmerica for their business needs. They provide up to $1 million in unsecured lending, with rates as low as 4.9% and approval within hours.
Work with an accelerator or incubator program
If you are looking for more than just financial support, an accelerator or incubator program may be right for you. Accelerator programs take place over a two to four-month period, where start-ups are given the opportunity to work alongside mentors that can help them grow their business. Companies are generally provided with a seed investment in exchange for a small equity share. Mentors are made up of executives, venture capitalists, and industry experts that have years of experience with successful business ventures. While accelerators focus on expanding your current business, incubators help brand new businesses get on their feet. Incubators tend to last a few years and often provide office space and legal counsel to members.
Pitch your idea to investors
An investor is a person or organization that devotes money to a business in exchange for a return on their investment. Venture capitalists typically assist technology-based firms with high growth potential, such as IT or communications. VCs expect a massive return on investment as they usually spend millions of dollars on each of the projects they support. As a result, VCs only support companies with a proven track record or an ingenious idea. In comparison, angel investors usually hold a seat on the board of directors of the companies they invest in. In addition to financial support, angels are well-known leaders in their fields and provide invaluable managerial and technical support to firms. You can usually contact angel investors online or through the attendance of business competitions.
Apply for a business grant
Most owners are unaware of the small business grants being offered by their local and federal governments. Small businesses spur job creation and economic growth, so it’s no wonder that governments are interested in supporting start-ups. For new businesses located in the United States, Grants.gov has a directory of more than a thousand federal grant programs available for you to investigate. Candidates are asked to fill out an application and provide necessary business and financial information. It is generally a lengthy process and a number of criteria must be met before you are approved.
Fundmerica’s Final Words
While securing funding for your new business may seem intimidating, there are several options available. It may be worthwhile to apply to various forms of assistance and see what you are eligible for. However, your success will depend on how well you sell yourself and your business, which means preparing a comprehensive business proposal is a good place to start, says Fundmerica.