Different Ways to Fund Your Business
Starting a business costs money. Even after your business is up and running, you could find yourself lacking the funds to remain operational, which makes understanding available funding options so important. There are many financial options to consider as a business owner, including where you can find capital funding for growth.
Below you will find different ways to fund your business:
Using your own financial resources depends on capital at your disposal—whether it is from your own savings, family, or friends, or using your own 401k. Choosing to self-fund increases risk because your own finances are on the line; therefore, if you choose this route, ensure you aren’t risking your own financial security or the security of your family.
While one benefit of self-funding is you maintain complete control over the business, it is important to weigh this benefit against potential financial instability. If you use your own retirement accounts, do not forget to consider any fees/penalties for early withdrawal.
Venture capital provides funds through investments in your business. It is possible to find investors who don’t expect to be completely involved in controlling your operations; however, these investors always expect part ownership, which isn’t an option for every business owner. Venture capital tends to be available for high growth companies. The benefit of this funding stream is that it is not a loan—it is offered with the expectation of financial gain.
If you have a unique idea and can show potential for higher returns, venture capital could be an excellent funding solution. Understand you have to sacrifice some ownership and often full control. It is also much harder to find investors. You can use approach venture capital firms, but make sure you do your research to find a reputable company.
Finding venture capital requires the following:
- A business plan potential investor can review before investing in your company
- Passing a due diligence review of your business plan to make sure you meet an investor’s criteria
- Agreeing to the terms and conditions laid out by investors if you want the funding
Once you find venture capital, you usually receive the funding in rounds, based on certain milestones outlined in the terms.
Crowdfunding is a relatively new option that makes it easier to find investors for a small business. Unlike investment capital, you are often dealing with a large, very diverse group of people willing to offer money to help start your business. These funds aren’t investments because the funders do not own interest in your company.
Those who opt into a crowdfunding opportunity are looking for something different in way of payment, such as free products or seeing their name listed as a funding source. This new concept is a popular approach taken by creative businesses attempting to start up, e.g., artistic productions or documentaries. Tech companies, too, start with the assistance of crowdfunders enthusiastic about a concept. Crowdfunding limits your risk because you don’t sacrifice any part of your business, maintain control, and have no consequences should the business fail. There are dozens of crowdfunding platforms online, each with its own terms and conditions. Be sure you fully understand expectations and legal obligations before committing.
Small Business Loan
Small business loans are the traditional route to funding a business. Of course, you maintain control of your business, but you do have to pay the money back in full with interest. One challenge is having the credit score necessary to secure the loan. Such loans also require a business plan to present to potential lenders, including, in most cases, expense sheets and financial projections for the first five years of the business.
Business plans also help you decide how much funding you should request. You simply prepare your documents and set up an appointment with the lender to apply for the loan. Interest rates and terms of the loan should play a key role when selecting lenders you wish to consider. The Small Business Administration (SBA) may be able to help by guaranteeing your loan, which makes it easier to find approval.
SBA Investment Programs
You also have a choice of investment programs offered by the SBA. There are general Small Business Investment Company (SBIC) loans available to small businesses, Small Business Innovation Research (SBIR) loans for small businesses engaged in federal research and development, and Small Business Technology Transfer (STTR) loans available for companies in the federal innovation research and development arena.
These are the most common ways to find capital funding for your business.