6 Startup Funding Options for Entrepreneurs
| 6 minutes read
Whenever we talk about startups, funding plays a crucial role in the development and growth of a startup, a survey has revealed (US market) that about 38 percent of startups have run out of funds, and 30 percent have 1-3 months of cash left. After the pandemic, things get worse, and small business entrepreneurs don’t have enough money or any kind of financial backup to continue the startup operations.
On the other hand, if you’re a newbie entrepreneur and want to start your own business, you might have to battle hard for your startup funding. Because in 2021 still, the market has not yet recovered from the loss due to COVID-19. However, the market experts say that the market will grow in Q2 2021, which will help entrepreneurs to start a business.
Whenever you think about the startup funding options, you need to focus on your business plans first because an investor will only invest if he/she finds it’s worth investing in your company. In your plan, include your vision for the next five years, tell investors how much return an investor will get after a particular duration, and why your products and services are superior to your competitors. So overall, these are the few things you need to answer when you approach investors; always remember an investor will invest in your business, only if he/she finds your business model appealing for the long term.
It’s important to analyze all angles of your startup and then set the target goal. To analyze each type of funding opportunity, make sure you’re starting your business in the right direction.
One wrong move can shatter your dreams, and misguiding your investors can spoil your brand image in the market. Below are the six popular options for funding a startup.
Let’s Begin Startup Funding Options.
- Family and friends.
- Venture capitalist.
- Angel investor.
- SBA Loans.
- Business incubators
1. Family and Friends.
This is the very first thing you can consider when you want investment for your business. Convincing your friends and family should be the very first thing you should consider. Investors won’t take you seriously if you don’t manage to convince people with whom you’re close. It’s a bit rational because getting your family & friends onboard is one of the easiest and the most popular ways to get funding for your business.
Show them a blueprint of your business plan. Those who are close to you can easily see through you and know if you are serious or just taking it as a new hobby or an experiment. You should not ask for more money; once you receive the amount, don’t ask for more. Be happy with what you get. Guilt-tripping your friends is a sure way to spoil your relationship with them, which will be ten times more painful if the business fails.
Be honest and discuss the possibility of failure. Because if you’re setting up your new business, it doesn’t mean you will get a sure shot at success. Also, in the case of failure, tell your friends and family members, it will be difficult to return the whole amount of money they invested.
In some countries like the USA, Canada, Germany, etc., giving money to your friends without an interest rate is seen as a gift. Even if your friend refuses to have a return of investment, you still should offer one and make him feel special.
2. Venture Capitalist (VC).
Venture Capitalists are those investors who will give you money for your business that you won’t need to return. Instead of money, they will take a part of your equity. They may also want to influence your business decisions, so be careful and read the full documents carefully before signing with them.
You’re the founder, so you must decide if partially losing your freedom is a good exchange for getting a large number of funds. VC will provide more financial help than most startups will end up needing but may make things difficult down the road for you.
In the future, VCs may restrict you from selling your own company. If any particular agreement is limiting your possibilities now, in the next five years, it may not be the same case because it is difficult to predict at this moment what the future may bring.
Still, in some cases, when your business plans are big and you need a hefty amount of funding for your business, then you can opt for this financing option for your company.
It is still advised to inaugurate your big ventures with smaller ways of financing options. Begin small scale, prove the viability of your idea and then find a venture capitalist and go big. But first, make sure you’ve prepared a road map to start your venture.
3. Angel Investor.
Angel investors work almost similar to venture capitalists, angel investors are those individuals who provide capital for a business, and in short, they support the company when no other investors want to invest in that business. They don’t invest a large amount in business, but they help companies when no other investors are ready to help. In short, they inject some amount and boost the growth of a company.
When your business starts making profits, often they want a portion of your business; it simply means when you start making money, they also make money by owning some percent of your company.
At the end, this is probably one of the most popular options for those who are serious about funding a startup because it enables you to keep control over your startup, earn mentorship when it’s required, and hopefully earn money as your startup grows.
A few reputed and famous places to meet Angel Investors include the Small Business Development Centers and Gust.
4. SBA Loans.
The Small Business Administration (SBA) works as a third party between small businesses and lenders to ensure fair loan terms. And SBA doesn’t offer loans directly; they work as mediators and ensure small businesses are protected. They make a fair deal between lenders and small businesses, so small businesses should not suffer any loss.
Using the SBA’s network of small business loan providers makes it easier for you to find the support you need for your startup. You can also search the lender network for an organization that will provide startup funding to your startup in a way that works the way you expect.
Some SBA lenders offer pre-approval in as little as 48 hours and loan closing in as little as 14 days from application. While SBA loans feature startup-friendly terms and predictable interest rates, SBA lenders require good credit scores (650+), moderate collateral and down payments, and detailed application to get approved.
Related Post: Bookkeeping, Shares, Accounting- ABC of Startup Funding
5. Business Incubators.
Business incubators are an organization that helps startup companies and individual entrepreneurs by providing support in various stages of development—starting with office space, management training and ending with venture capital financing.
Generally, incubators invite future businesses and companies to come and use their premises and their logistical, administrative, and technical resources. For, i.e., an incubator might allow the use of its laboratories so that a new company can test and develop its own products at an affordable rate before the final production starts.
The incubation phase can last up to twenty-four months. Once the final product is ready, companies leave the incubator’s premises and enter the industrial final production phase.
Companies that receive this kind of help and support often operate in state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology.
Crowdfunding simply means raising funds from multiple funders, often via crowdfunding websites.
Crowdfunding allows startup entrepreneurs to raise funding for their startup and help a company to promote or advertise its products or services. If you’re thinking about setting up a crowdfunding campaign, then this might be one of the best startup funding options you can choose, and it’s easy to operate.
You need to set up a profile on a crowdfunding website, mentioning your company details, including your company information, and naming the products and services, you’re offering. And finally, mention the amount of money you’re trying to raise via crowdfunding.
If a person shows interest in your campaign and donates some amount, then you can offer some kind of reward for their donation or a discount coupon on your products and services. Some companies even share some form of profit share in the business.
The successful mantra towards crowdfunding campaigns is to tell a meaningful story about your company and why you raised crowdfunding? Also, mention how your products or services can resolve people’s problems. This will impact the majority and will give them a reason to donate funds to your company.
Rewards-based crowdfunding is one of the attractive options for startups, as you are not giving away any profit sharing or a part of ownership in your company. You’re just offering some discount on some of your products or services.
A crowdfunding campaign also helps to build a community of audiences interested in your products or services and delivers a sense of engagement for the donor.
The above six ways for funding a startup are a great and ideal place to begin your business journey with investors.
However, there are other, less popular options for funding, including self-funding, sweat equity, government grants, and more, that do work best for specific situations.
Advice- We will always advise you to adopt these six funding first rather than focusing on other options.
Suprotik Sinha is the Content Writer with Synkrama Technologies. He writes about technologies and startups in the global enterprise space. An animal lover, Suprotik, is a postgraduate from Symbiosis Institute of Mass Communication (SIMC) Pune. He carries 6+ years of experience in Content Writing, and he also worked in mainstream broadcast media, where he worked as a Journalist with Ibn7 ( now known as News18 India) and Zee Media in Mumbai.