Article | July 23, 2021
Are you set with the business idea? So now is the real mammoth-sized challenge that is how to get startup finance? As the adage goes, "never put all your eggs in one basket," and this is especially true when it comes to startup financing options for your business. Entrepreneurs ought to understand the importance of diversifying financial sources and the available options. It is crucial to select the appropriate startup financing for small businesses.
According to a 2020 Federal Reserve report, new company small businesses are the primary source of job growth in the United States. Still, they are much more likely than larger firms to face financial difficulties in accessing borrowed capital.
Millions of Americans start their businesses each year. According to the Census Bureau, there would be over 4.3 million new business applications in 2020 alone.
It is vital to choose the suitable funding options as per your business requirements. Because every business's needs and circumstances are unique, no financial solution is one-size-fits-all.
Some choose to finance their startups with their years saved capital or get “love money” from family, spouse or friends, or any other funding options. How you choose to fund your business determines the structure and operation of your business. Hence, finding appropriate funding for startups is a bit tricky.
In this blog, explore few options of startup financing for small businesses and grow your business.
What is startup financing for small businesses?
Startup capital is a large sum of money raised to help with the financial needs of new businesses. Small business startup loan covers all the major company’s initial costs, such as purchasing equipment, working capital, machinery inventory, supplies, licenses, office space, furniture, product development, purchase of construction equipment or real estate.
Funding for startups can be provided by venture capitalists, angel investors, banks, or other financial institutions. It is pretty common that a new business might require more than one round of startup capital investment. In addition, many investors ask for a solid business plan in exchange for their money due to the risk involved in investing in the young company.
Advantages and disadvantages of startup financing for small businesses
• You will have enough money to start your own business.
• Personal wealth can be safeguarded.
• You have the option to retain ownership.
• You can establish business credit.
• It isn't easy to get startup business loans approved.
• High-interest rates.
• These loans may limit cash flow.
• Your personal credit may be jeopardized.
• You might not get all the money you asked for.
Where can I get a small business startup loan?
Small Business Credit Cards
Business credit cards are the most preferred option of startup financing for small businesses. As a result, small businesses are highly targeted by business credit card issuers providing them multiple offers, unique benefits, and applications.
Small business credit cards give small business owners easy access to a changing line of credit and a set of credit limits for making purchases and withdrawing cash. Business credit cards are safe, convenient, and a great alternative to startup business loans.
Applying for small business credit cards can be quickly done online or through banks. The criteria to qualify for a small business credit card depends on the business owner’s credit score and combined income (personal and business). Small business credit cards are convenient startup financing options.
Choose a credit card with a 0% APR to save money on interest. You will be able to pay off your debts in full each month once you start generating revenue. According to a recent Federal Reserve Small Business Credit Survey, 53% of small businesses use credit cards to help fund their operations.
The most significant advantage of a small business credit card is that you can access the funds immediately for short-term needs, potentially increasing your company's purchasing power.
Venture capital funding is a good choice of startup financing for small businesses. Venture capital is a type of equity and financing provided by investors to start-ups and small businesses with the potential for long-term growth. Venture capitalists are a type of investor who typically invests in a business against equity and holds a small portion of the company's ownership in exchange for capital.
When investing, venture capitalists consider a few criteria, such as specific industry sectors, company stage, and geography. In addition, venture capitalists frequently seek entrepreneurs with a robust business model that has the potential for higher returns.
Venture capital financing is difficult to obtain because, as a business owner, you must ensure that their focus matches your company's and its stage of development.
Venture capital is a time-consuming process that looks for more considerable opportunities that are stable, have a strong team, and have good traction. However, because venture capitalists provide a lot of mentorship and ownership, this may not be the best option for you if mentorship and compromising do not fit in your books.
Crowdfunding is a new trending option of startup financing for small businesses and has increased over the past few years due to its low risk for business owners. Crowdfunding is a way to raise startup capital through small contributions or investments from many individuals via crowdfunding websites or crowdfunding platforms.
To raise funds for startups through crowdfunding is not very difficult; it just requires setting up your company profile on the popular crowdfunding websites or crowdfunding platforms available. The profile needs to describe your company, its business, the products or services you deal in, and the amount of money you wish to raise.
Interested people can contribute to your campaign in exchange for a reward for their contribution. In addition, setting up a crowdfunding campaign gives exposure to your young company seeking money for the startup.
Crowdfunding for startups is accomplished by gathering donations from diverse people in exchange for a special reward. This incentive could take the form of free products, exclusive discounts, first access to new products, premium merchandise, the opportunity to join the team, or even becoming a significant capital investor.
Some of the popular crowdfunding platforms in the US include Kickstarter, Indiegogo, RocketHub, Onevest, SeedInvest, and many more. Each crowdfunding platform charges a fee to list your campaign, a flat fee or a percentage of the funds raised.
Because each crowdfunding platform is unique, make sure to read the fine print and fully understand your financial and legal obligations.
Love money from family and friends
Love money is nothing more than approaching your spouse, friends, and family for a loan to start your business. This is the most common type of financing option used by many companies, and it is one of the most essential sources of startup financing for small businesses at early-stage businesses.
Regardless of whether you have a personal and healthy relationship with your family and friends, never approach them solely for financial assistance. The mature move is to present them with a well-prepared business plan, financials, and other necessary documents. Then, request their valuable feedback on your business plan, as well as their advice based on their business experience, if any. This approach demonstrates your regard for their knowledge and expertise.
Despite all the benefits listed above, a business relationship with family or friends should not be taken lightly. Never assume that your close family or friends will lend you money. Do not take their financial assistance for granted.
Angel investors are another excellent source of startup financing for small businesses. Unfortunately, many people believe that venture capital and angel investors are the same things, but this is not the case.
Venture capital is the companies that invest in your business. In contrast, angel investors are wealthy individuals or successful retired business executives who invest directly in small firms and take an equity stake in the new venture.
Angel investors are one of the few startup financing options sought out during the early stages of a new business's growth.
Along with funds, angel investors offer advice based on their experience, technical and management knowledge, and network of contacts. As a result, Angel investors frequently have a low profile and invest less than venture capitalists.
Personal loans for business
A personal loan for business may be worth considering for entrepreneurs with excellent personal credit and a new business idea worth putting your own money on the line for. The benefit of this option is that there are no hidden fees; it is simply a personal loan.
Personal loans have lower interest rates and easier repayment terms than business loans. This is an effective startup funding option because it can be used for almost any purpose.
The most significant disadvantage of a personal loan is that you are the sole accountable if your business fails and is responsible for the repayment of the outstanding balance. However, this can be a viable option as a startup financing for small businesses if you need a relatively small startup capital.
Small business administration (SBA) loans
The SBA does not lend directly to small businesses; instead, it offers various loan guarantee programs to qualifying banks, non-profit lenders, and credit unions. For example, some banks offer low-interest loans to small businesses that are backed and guaranteed by the Small Business Administration (SBA). They target underserved companies and make loans to start-ups.
The loan application process is time-consuming, with stringent requirements for qualified small businesses. As a result, the Small Business Administration (SBA) offers a few startup programs such as micro-loans and Community Advantage.
Equipment financing is the top option if you need startup financing to purchase equipment and machinery. Because the equipment you will buy will serve as collateral for the loan, lending standards for equipment financing may be less stringent. However, if you do not return the money, the bank may seize your equipment to cover the cost of their lost money.
Dealerships, banks, and online equipment finance providers all offer equipment financing.
The main advantage of equipment financing is that you gain ownership of an asset, the payments for which are spread out over time, which is generally one to five years.
Frequently Asked Question:
What do you mean by startup funding?
Startup funding is money raised to help a new business meet its initial costs. To raise startup capital, entrepreneurs must create a compelling business plan to sell their concept to potential investors.
Where can I find startup financing?
Angel financing, crowdfunding, small business credit cards, venture capital, equipment financing are few popular options to find startup financing.
What are the types of funding?
Crowdfunding, venture capital, angel financing, small business administration loan, small business loans are few types of startup financing to businesses.
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