No matter how great the concept or talented and innovative the people involved are, no business can get off the ground without funding. Like much of the rest of the business world, the methods in raising capital have gone through a revolution, with more options available than ever before. However, each one has its strengths and weaknesses. So, after much research and expert advice, these are the top funding options for your business.
Determine how much funding you’ll need
Although funding is critical, many start-up businesses fail before they even get begun as they start undercapitalized. Businesses that do not perform full business analysis on every aspect of their business requirements, from product development to staffing, marketing, fulfillment, and other vital business functions, will inevitably underestimate their funding needs.
This often initiates a domino effect as the business is forced to cannibalize itself in order to plug the holes, causing a greater shortfall that will eventually lead to a total collapse. A successful business begins with knowledge of the financial needs before launch. It also provides vital information to know what type of funding should be pursued.
PT Barnum once said, “Money is a terrible master but an excellent servant”. And just like the famous showman said, making sure that you have the right amount and type of funding can determine whether your money aids or controls your business.
Though it seems obvious, many people do not fully look at their own resources to start a business. There are major advantages to leveraging your assets. First and foremost, any profits you make are entirely yours. In addition, you are the decision maker and exercise full control over your business.
Fred Gerantabee, CEO of Readers.com, sees the advantages as well. “Being able to start a business without outside capital is the most desirable position an entrepreneur can put themselves in. I highly recommend that anyone who wishes to start a business, analyze how much they can fund before they attempt to launch their venture.”
However, there are drawbacks as well. Those who try to start a business off their own monetary reserves, often underestimate their funding needs. In addition, while it is true that since you would own the entire business, meaning you are entitled to its profits, you also assume all of its risk. In most cases, bootstrapping your funding is only wise if your business is small with limited risks.
The most common type of funding are small business loans. These are generally stable bank loans that are acquired for modest interest. These loans are paid monthly and can be given over 20 or even 30-year periods, depending on the amount and whether the interest rate is fixed or adjustable.
SBA loans are usually the first place that start-ups generally reach out to. If you qualify, these can be an excellent option. Standard bank loans are also a smart choice as most banks have set up funds solely for small business ventures. In addition, the federal government, in conjunction with the states, has small business lending funds that are available.
Ubaldo Perez, CEO of the innovative company Hush, believes you should look at each option carefully, beginning with the most traditional. “SBA loans are a good place to start if you are looking for safe and secure loans. Look for the banks that have reputations of working well with small businesses. If you take time to do your research, you will eliminate a lot of unnecessary headaches.”
However, those who wish to acquire a business loan should prepare for a long process and should heed the words of famous venture capitalist, Richard Harroch, “It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So, plan for that.” Banks are not in the business of loaning out money without assurances that they are going to get paid back. Checking your credit history, your financial statement, and your business plan may all be involved and could take a while.
Loans are great but free money is even better. They are more limited and require work to obtain, but there are some grants available for small businesses ventures and start-ups. Organizations such as the National Association for the Self Employed have grant money programs.
Akhilesh Srivastava, Founder and CEO of Fenix Commerce, a company helping brands improve their eCommerce, think that everyone should take advantage of these programs. “If you can get a grant, then do it. This is free money that does not dilute ownership. It is definitely worth taking the time to apply and see if you can get a piece of this pie.”
Creative Director of the CBD relief company, mode, Jorge Vivar, concurs, “There is a surprising amount of programs out there that provide grants. It is my belief that any start-up should try to take advantage of as many of them as you can.”
While these are fantastic, as it is basically seeded money that does not have to be paid back, there are limits on funds available to each venture. Organizations such as Nav’s Small Business Grants are actually quite easy to apply for. Yet, while any money is good, for most start-ups and other business needs, these serve mainly as spot funds, meaning they will fill some gaps, but will not cover all funding needs.
Financial Technology (FinTech)
A growing trend in funding is through financial technology lenders. These companies provide both funding as well as lines of credit, offering an alternative to the more traditional loans given by banks and other established institutions.
Options vary and depending on what type of business you are in, and the services you seek, there are several different options. For instance, Kabbage is an attractive lender for eCommerce businesses as their metric for establishing lending policy is based on your online selling status.
Arka CEO Phillip Akhzar sees Fintech’s metrics as an advantage to a new business. “If you are just starting out, it may be difficult to get funding through traditional means. The fact that these companies measure acceptable risk differently, gives many entrepreneurs some viable alternatives.
Stephen Skeel, Co-founder of 7 Wonders, a unique alternative video production company, also understands the attraction. “If you are trying to start a business, many banks will ask for collateral, something that may be difficult to come by. However, the fact that Fintech lenders look at business through a different lens, opens up all sorts of possibilities.”
Like other funding options, it is important to do your research to find which ones will best fit your needs. In addition, ease of qualifying should also be a consideration.
The momentum for this fundraising alternative has not slowed down. While searching to gain access to funding through private donations, there are differences in the options which you should be aware of.
Daniel Sathyanesan, the founder of Winden, a company that specializes in banking for freelancers and entrepreneurs, warns of the pitfalls. “Crowdfunding can be a viable option, but people must take several things into consideration. Items such as what you are offering to investors, and the structure or rules of the crowdfunding website, can lead to problems if one goes into it blindly.”
Make certain you know the rules of the crowdfunding technology you utilize. Factors such as financing goals and fee percentages can surprise the uninformed.
Peer to Peer Lending
One of the major challenges for many businesses, especially in the tech world, is explaining your venture to those who may have difficulty understanding it. Peer-to-peer lending solves much of this problem. Services such as Prosper and Lending Club, can connect you with like-minded individuals that can provide you with the capital you need.
Brandon Sunny, CEO of Royal Moon, a CBD products company, explains why this may be the best route. “Banks and traditional lending institutions are more stringent in their views of what constitutes a viable business. Often, they don’t have the same foresight. Peer-to-peer lending gives you an avenue to like-minded individuals.”
VITAL, a unique credit card company, CEO Chris Bridges, agrees. “It is sometimes very difficult to get people to think outside the box. Many are so used to the ways things have always been done that it is difficult to get them to see the merits of doing it a new way. Peer-to-peer lending can be a breath of fresh air when it comes to raising funds.”
Some start-ups have a long-term strategy for growth and what could be seen as a more traditional foundation to build upon. However, many of these types of businesses require more than just a little funding. In this case, you may need to approach a more sophisticated investor who is looking for bigger investment for bigger gain. In this case, a venture capitalist may be the best choice.
Max Scwartzapfel, CMO of legal services at Fighting For You, regards venture capital as the first step in funding for some businesses. “It is important to be realistic about your funding needs, and looking for small loans, grants or other types of lending that will piecemeal your funding needs will be long, complicated, and often, inadequate. If you are confident in your plan and have a long-term vision for your company, a more sophisticated investor may be in order.”
Websites such as FundersClub and MicroVentures offer ways to connect you to those types of investors who are looking for the opportunity your vision may provide them.
Before you decide on a funding option, make sure you run your business through the validation process. In addition, look at all the angles, and where questions may arise. Whether you take a traditional or non-traditional approach, people will have many inquiries, and the businesses most likely to get the funding they need are the ones which take those into consideration before a request for funds goes out.