One of the biggest obstacles that budding entrepreneurs face is raising money to start their businesses. They’ve got the vision and they’ve got the passion; now, they just need someone to believe in them.
That could be easier said than done, though. It’s not uncommon for startup owners to be turned away time and time again before they are able to persuade that one investor. That’s why it’s important to be resilient and keep trying. You never know who is going to be the one to help you achieve your dreams!
The good news is that there are several avenues where you can look for capital to fund your startup. Each of them has its pros and cons, so it’s important to access each option to decide which direction you would like to go in. Money is money, but sometimes, money can come with some attached baggage too.
Here are 8 ways to raise capital to start a new business.
Bootstrapping is just a fancy way of saying that you use your own money, resources, and assets to fund your business venture. Self-funding is the best option available to new entrepreneurs. Since you don’t have anyone else to answer to, you have full control of your business. And you don’t have to worry about paying back debt or fulfilling any obligations to a third party. Plus, it may even push you to work harder because you’ve risked it all.
While bootstrapping is ideal, realistically, many young entrepreneurs these days don’t always have the option as they don’t have much to their name in terms of money or assets. Even if they do, if their vision requires some big capital, it would not be able to go forward without additional third-party funding.
The next place to look for financial assistance would be from your friends and family. As these are the people that trust you and believe in you, it would be much easier to get funding off of your loved ones than a stranger.
There’s also less pressure to have paperwork drawn up, although some people do prefer it. You may also be able to avoid giving away any equity or control of the company while raising funds from your inner circle.
If your business idea falls into certain categories that interest the government, namely in the fields of clean energy, sustainability, biomedical research, or nonprofit, you may be able to get a government grant. It would be a big win if you qualify for one as they do not have to be paid back and don’t require you to give up a controlling stake in the business. However, unfortunately, government grants have an extensive application process and have very specific criteria, so it’s not as easy to be chosen for one.
Another option you have is to get a traditional bank loan. However, while investors are prepared to take on losses when they provide money to a startup, but banks are not. This means that they need to be paid back no matter what.
There are different types of bank loans that one can get to start a business. A personal loan would be the easiest to get, given that you have good credit. However, since the business is new and has no performance history to show, you could be slapped with high-interest rates. You may be able to get a government-backed business loan which comes with low-interest rates, but these are also difficult to get as they have stringent requirements. Make sure to compare prices from different loan providers before picking one if this is the path you decide to take.
Crowdfunding has become much more popular in the recent decade thanks to the internet. Now, anyone can help fund a business, be it with a few dollars or a few thousand dollars. Contributions to a crowdfunding campaign may promise equity or rewards in returns. Tangible rewards include merchandise, exclusive access, memorabilia, or even the product itself at a lower price. Giving rewards instead of equity also allows you to maintain sole control of the business. Some of the most popular crowdfunding platforms include Kickstarter, SoMoLend, FundRazr, and Wefunder.
Angel investors are wealthy individuals who fund startups at the very early stages of conception. They provide “seed” money, which is typically out of their own pocket and can range between a few thousand or a few hundred thousand! For their contributions, they usually take a percentage of equity in the company in return. Angel investors are typically people who are experts or have a lot of interest in your industry, so they tend to take on advisory or mentoring roles in your company as well.
Angel investors can come as individuals or as groups. Angel groups consist of several wealthy individuals who pool their money to invest a significantly large amount in multiple startups. You can look up accredited investors in your industry at the Angel Capital Association.
Venture capitalists are very similar to angel investors in that they fund larger business ventures and take on equity in the company as well as advisory roles in return. However, unlike angel investors, VCs tend to focus on later-stage funding, usually exceeding an amount of $2 million of capital, and are much more influential in their advisory roles.
Also, unlike angel investors, VCs do not use their own money but use other people’s money in the form of private equity, pensions, etc. They tend to take on high-risk, high-reward businesses that are likely of being sold or reaching an IPO down the line. This is why VCs prefer young technology startups.
If you are planning to go in the route of getting funding from venture capitalists, ask yourself if your business can make $100 million or more. Otherwise, VCs probably won’t be interested!
The methods discussed above are just the traditional methods of raising capital for a new business but don’t limit yourself to them alone. There are plenty of other ways in which you can fund your dream business, you just have to think outside of the box.
For instance, many people tend to take on other projects to help pay for a new startup, such as freelancing jobs, or monetizing a website/blog that documents the journey. Some entrepreneurs have even successfully landed reality TV shows that follow along with their startups. You could also approach a successful existing business in the industry to partner with initially so as to get your product out there. These are just some avenues that can help you make money and put more eyes on your business.
A Final Note
A good rule of thumb is to always try and maintain as much control of your business as possible. That is why we recommend bootstrapping as the best method of raising money for a new business. Seeking out investors who require equity in exchange should be your last choice, but we understand that some ventures just can’t function without large amounts of capital that only they can bring in. So, how you choose to fund your startup will depend on your unique circumstances, but don’t forget to consider the pros and cons carefully.