If you're considering starting your own business, you need to know the facts. 70% of small businesses fail within the first 10 years.
This doesn't mean a startup isn't worth the investment. This just means you need to know how to fund your business so it doesn't become another statistic.
The biggest problem starting is how to fund a startup. There are many options to choose from. You need to figure out which option will fit your needs.
Understanding Startup Funding
Startup funding takes in any assets you can access to get your startup company off the ground. This usually means money, but it can also take in other assets such as office space or production that help you get started.
Most startup funding falls into one of two categories. You can get small business loans or look for investors. Learn more about these two categories before you assess the options available.
Each type of funding will fall into these two categories. Loans are funds you must pay back in installments. Investments are funds you pay back through royalties, stakes in your company, or other means.
Small Business Loans
You have a better chance of getting a loan if you have good credit as an individual. This means your funding planning starts with a comprehensive check of your current credit.
A small business loan requires you to pay the money back in monthly installments. You'll also pay interest on the loan, based on the rates applied to the loans.
Bank Loan or Line of Credit
A bank loan is the best-known option available for funding. You can also look into loan companies, but tread carefully with this option. Many lenders have high-interest rates for paying back the money.
You will need a good credit history to take out a loan or open a line of credit for a new business. You can also get a loan if you have assets worth enough to put up as collateral against the loan.
You can go to banks in your area to apply for loans. You can also go through the Small Business Administration (SBA) to find other loan options. The SBA has several resources for funding so you have options to choose from.
Trade Equity
Trade equity is a little different in terms of loans. This acts more like a bartering system.
With trade equity, you negotiate with another company to trade assets or skills in exchange for assets or services you need to get started. This can include physical assets such as office space or equipment. It can also include services such as planning or legal help.
Crowdfunding
Crowdfunding can act as a loan or an investment. The terms will differ depending on the terms set during the crowdfunding campaign.
With this option, you receive funding from multiple individuals. Many websites exist to help with crowdfunding.
You pay the investors back based on the terms agreed upon. This can involve offering products or services to those that lend money once you get started. You can also make monthly payments to pay back the individuals.
This can work as an investment if you offer a partial stake in the company to those that give money. Your investors then receive payment based on their stake in the company as you make a profit.
Investors
Investors are people or groups that invest capital in your startup in exchange for a stake in your company. These groups act as partial owners of the company until they sell their hold back. This means they make money if your company does.
Venture Capital Investors
Venture capital investors are usually firms or groups of people that pool money to invest in specific projects or companies with high growth potential. In exchange for the capital, you give over a percentage of your company's stock or ownership to the group.
They invest in the company, not the individual. If your business fails, they can liquidate the business to get their money back.
Angel Investors
Angel investors are individuals that provide funding to an individual in exchange for stocks in the business. They usually cash out the stock after a couple of years to get their money back.
This is a higher risk investment for them as they get nothing back if the business fails.
Small Business Grant
In rare instances, you can get a state or federal grant from government offices towards your startup. These grants get awarded to fund projects that further the goals of the department offering the grant.
There's no obligation to pay grants back in most instances. If applying for a grant, you need to check the terms carefully though.
Partnership
A partnership is a good idea if you have a business you can work with. You find someone that believes in your idea enough that they'll give you an advance on funds or production.
This usually involves production terms. You pay royalties to the partner in exchange for needed assets. This includes
- White labeling- another company produces goods and allows you to put your brand name on it.
- License agreements- you receive permission to use assets owned by another party in exchange for royalties on the products involved.
What About Investing in Yourself?
It's not always necessary to look for outside funding. If you're careful, you can invest your personal funds to get a startup off the ground.
This option is called bootstrapping. You start on a smaller scale, using your funds to get the assets necessary. It's risky but allows you more control of your business.
How to Fund a Startup: Be Smart!
How to fund a startup is just one of the many questions that will come with starting your own business. You need to know how to run your business effectively to keep from failing.
Do you have more questions about starting a new business with limited funding? Check out more startup tips to give you the financial start you need.
