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Bongiorno!
There are several ways to get startup funding, but the easiest way is to find investors who believe in you and your product or service and then borrow from them or exchange money for a share in the company.
Investors can provide financial backing and access to networks of customers, suppliers, and other entrepreneurs. They can also bleed you dry by absorbing a large amount of equity from your business.
While investors are the ideal way of getting the capital you need to get your business off the ground, other methods are worth exploring. Read on to learn more about financing your new company. Let’s get you paid.
The Most Common and Realistic Ways to Finance a Startup
There are a few different types of funding available to startups. The most common and reliable sources are.
- Personal savings
- Friends and family
- Crowdfunding/Venture Capital/Angel Investors
- Bank loans
- Government grants
- Small Business Administration (SBA) loans
- Microloans
- Business credit cards
The Three Main Funding Types
Now that you know the different types of startup funding available, let’s dive into how to get it.
- Equity financing
- Debt financing.
- Grant funding
Equity financing is the most common type of startup funding, but it’s not the only option. Debt financing and grant funding are also options to consider.
Using Debt to Fund a Startup
Debt financing is borrowing money and agreeing to pay it back with interest. This can be in the form of bank loans, microloans, or business credit cards. They all have their place, and we’ll discuss all of them.
Sacrificing Equity for Funding
Equity financing is when you give up a portion of ownership in your company in exchange for funding. It can be in the form of venture capital, angel investors, or even crowdfunding.
You know what we love at Urban Monks? Shark Tank. Hey Kevin, if you’re reading this, we’ll give you 10% equity in our agency for $1 million. Think about it.
Grant Options
There are several options out there for grants. What is a grant? It’s free money!
Because it’s essentially free, the competition is high. These typically come from the government but can also come from private companies and foundations. If you want this cash, you need to make sure all of your ducks are in a row.
Equipment Financing Options
Equipment financing is when you purchase the equipment you need for your business without paying for it all upfront. You can spread the cost of the equipment over time through a loan or lease agreement.
Invoice Financing: Thinking Outside the Box
Invoice financing allows you to use your unpaid invoices as collateral for a loan. With invoice financing, you can get the money you’re owed immediately, rather than waiting for your customers to pay their invoices.
There are two main types of invoice financing: factoring and invoice discounting.
With invoice factoring, you sell your invoices to a lender at a discount. The lender then collects payment from your customer and gives you the balance minus a fee.
With invoice discounting, you borrow money against your invoices and are responsible for collecting payment from your customers.
SBA Programs
At Urban Monks, we love the options and flexibility that the SBA offers business owners. The Small Business Administration (SBA) offers a number of investment programs that can provide funding for your business.
You’ll need to bear with us for a bit. The below information can be a bit of a snoozer. But it’s important and you should know all the information before making large financial decisions affecting your company’s future.
Small Business Innovation Research SBIR program
The Small Business Innovation Research (SBIR) program is a competitive grant program that provides funding for SMBs to conduct research and development (R&D) projects.
To be eligible for the SBIR program, your business must have less than 500 employees and must be for-profit. You must also be engaged in R&D activities that have the potential for commercialization.
Small Business Technology Transfer STTR program
The Small Business Technology Transfer (STTR) program is a competitive grant program that provides funding for SMBs to collaborate with research institutions on R&D projects.
To be eligible for the STTR program, your business must have less than 500 employees and must be for-profit. You must also be collaborating with a research institution on an R&D project.
GCA Programs
Several government contract assistance programs can help you get the funding you need for your business.
The 8(a) Business Development Program is a government contract assistance program that supports small businesses owned by socially and economically disadvantaged individuals.
If you’re eligible for the 8(a) program, you will receive help with a variety of business development activities, including proposal writing, marketing, and financial management. You will compete for government contracts set aside for 8(a) businesses.
The HUBZone program is another government contract assistance program that supports small businesses in historically underutilized business zones.
If you’re eligible for the HUBZone program, you will be able to compete for government contracts set aside for HUBZone businesses. You will also receive help with a variety of business development activities, including proposal writing, marketing, and financial management.
The Service-Disabled Veteran-Owned Small Business (SDVOSB) program is a government contract assistance program that provides support to small businesses owned by service-disabled veterans.
If you’re eligible for the SDVOSB program, you can compete for government contracts set aside for SDVOSB businesses. You will also receive help with a variety of business development activities, including proposal writing, marketing, and financial management.
NRA Assistance Program
The Natural Resource Sales Assistance (NRSA) program is a government contracting assistance program that helps businesses sell natural resources, such as timber, minerals, and oil and gas.
If you’re eligible for the NRSA program, you will receive help with marketing your natural resources, negotiating contracts, and getting bonded.
SMB Grants
In addition to the SBIR and STTR programs, several other small business grants are available.
Grants Available That Are Industry or Diversity Specific
A number of small business grants are available to businesses in specific industries or owned by members of certain groups.
The Women-Owned Small Business (WOSB) program is a government contracting assistance program that supports women-owned businesses.
If you’re eligible for the WOSB program, you will be able to compete for government contracts set aside for WOSB businesses. You will also receive help with a variety of business development activities, including proposal writing, marketing, and financial management.
The Minority Business Enterprise (MBE) program is a government contracting assistance program that provides support to businesses that members of minority groups own.
If you’re eligible for the MBE program, you will be able to compete for government contracts set aside for MBE businesses. You will also receive the same kind of help that the WOSB receives.
SMB Loans
A small business loan is a good option if you’re looking for funding to start or grow your business. Several government programs offer loans to small businesses, including the Small Business Administration (SBA) 7(a) loan program.
To be eligible for this loan, your company must meet the SBA’s size standards. You will also need a good credit history and demonstrate that you can repay the loan.
The SBA’s 504 loan program provides long-term, fixed-rate financing for major equipment or real estate purchases.
SBA Microloan Program
The Small Business Administration (SBA) microloan program provides loans of up to $50,000 to small businesses and startup companies.
To be eligible for an SBA microloan, your business must meet the SBA’s size standards. You will also need to have a good credit history and demonstrate that you can repay the loan.
Microlenders
Microlenders, such as Kiva, are nonprofit organizations that provide small loans to businesses. Microloans typically have one-year or fewer terms, and the maximum loan amount is usually $50,000.
Some microlenders also offer technical assistance and training to help you start and grow your business.
Whew! You still with us? If not, it’s time to wake up. You really don’t want to miss the rest of this post.
Take Out a Personal Loan
A personal loan is a decent option if you’re looking for funding to start or grow your business. They are typically unsecured, which means you won’t have to put up collateral for the loan.
To have eligibility, you will need to have a good credit history and demonstrate that you have the ability to repay the loan. The maximum loan amount and interest rate will vary depending on the lender.
Ironman Your Funding with Bootstrapping
Ok. Not that kind of Ironman. We mean doing something all by yourself.
Bootstrapping is a means of funding a business without borrowing money or giving up equity. You can use your own savings, credit cards, and personal loans to finance your business.
It’s an option if you don’t want to give up equity in your business or if you can’t qualify for a loan. But it can be risky because you could lose your personal savings if your business fails.
Startup Incubator and Accelerator
A startup incubator is a program that helps early-stage businesses grow and succeed. Startups in the incubator receive mentorship, access to resources, and often a small amount of funding.
To be eligible for an incubator program, your business must meet the program’s requirements. These requirements vary depending on the program, but they typically include having a minimum amount of revenue or being in a certain stage of development.
A startup accelerator is similar to an incubator but is usually more intense and focused on helping startups snowball. Startups in an accelerator program receive mentorship, access to resources, and often a small amount of funding.
Try to Negotiate an Advance
If you have a product or service that a strategic partner or customer needs, you may be able to negotiate an advance from them. An advance is a loan paid back over time with the product or service you provide.
Talk to Friends and Family Members
Your personal network can potentially be a good source of funding for your business. But before you ask them for money, you need to have a solid business plan and pitch.
Get ready to answer tough questions about your business, such as how you will make money and the company’s risk profile.
Honestly, this is a last resort. Going into business with friends or family can lead to complete ruination of both your company and your personal relationships.
Build a Crowdfunding Campaign
Crowdfunding raises capital by asking for small amounts of money from many people. You can use crowdfunding to finance your business by creating a campaign on a crowdfunding website. Kickstarter and Indiegogo are popular options.
Create a compelling campaign that tells potential investors why they should invest in your business. You will also need to offer rewards, such as equity in your company or products from your business, to encourage people to invest.
There are tons of success stories using crowdfunding. This includes the VR company Oculus and the film Super Troopers 2.
Keep It Local
There are often local contests and grants available to startups. Search online or contact your local Chamber of Commerce or Economic Development organization to find out what’s available.
Some local contests and grants require you to match the funding you receive. So if you’re not prepared to invest your own money in your business, this may not be the best option for you.
Don’t Quit Your Job – For Now…
If you’re not ready to quit your day job to start your business, that’s OK. You can finance your business by keeping your day job and working on your business in your spare time. Keeping your day job is a key element if you’re looking to go the bootstrapping route.
Venture Capital for the Win
Venture capital is a type of private equity used to finance early-stage businesses. Venture capitalists are usually interested in investing in companies with high growth potential.
To get venture capital, you must have a solid business plan and pitch. You will also need to demonstrate that you have a good team and that your business is worth an investment.
Venture capitalists are often interested in businesses that have the potential to make a lot of money. But they also understand that most startups fail. So they will only invest if they believe there is a good chance that your business will be successful.
Funding Rounds
When we first heard about this, we thought it was truly bizarre. How many times does a company need to ask for money?
The answer, apparently, is fairly often.
There are different types of funding rounds, and each one has its own purpose. These are the most common types of funding rounds.
PreSeed
Pre-seed funding is used to finance the very early stages of your business, such as developing your business plan.
Seed
Seed funding is used to finance the early stages of your business, such as developing your product and building your team.
Series A
Series A funding is used to finance the growth of your business. This type of funding usually hires additional staff, expands into new markets, or develops new products.
Series B
Series B funding is to finance the expansion of your business. This type of funding should be to open new offices, enter new markets, or launch new products.
Series C
If you make it here, you’re well on your way to being a successful company. This round of funding is all about buying new companies and further expansion.
Credit Cards
Credit cards are a fine option for financing your business if you have good credit and can qualify for a low-interest rate. At Urban Monks, we believe that credit cards can help accelerate new business growth if used wisely. Here are some of our favorites.
Chase Ink Cash Credit Card
The Chase Ink Cash Credit Card is a good option for businesses. There is no annual fee and offers 5% cash back on purchases at office supply stores. You’ll earn $750 cash back after you spend $7,500 in the first 90 days.
Chase Ink Unlimited Credit Card
This Chase Ink Unlimited Credit Card is similar to the Cash version, but has an unlimited 1.5% cash back on everything you buy for your business.
Both cards offer 0% APR for the first 12 months.
American Express Blue Business Plus Credit Card
The Blue Plus Card is similar to the Blue Cash card, with one notable exception. Instead of cash back, you’re rewarded with membership points.
American Express Blue Business Cash Credit Card
The Blue Cash Card gives you 2% cash back on business expenses and 1% on everything else. You earn a $250 statement credit after spending $3,000 the first three months you have the card.
The card has no annual fee and offers a 0% introductory APR on purchases for the first 12 months.
Preparing a New Business for Funding
Once you’ve decided to pursue funding for your startup, you can do a few things to prepare your business and increase your chances of success.
How New Are You?
If you’re a startup, they’ll want to know how much experience you have in your industry and whether you have a viable business model. If you’re an ongoing business, they’ll want to know how long you’ve been in business, how much revenue you’re generating, and whether you’re profitable.
Build Your Business Plan
If you don’t have a business plan, now is the time to develop one. Your business plan should include your company’s mission statement, an overview of your products or services, your target market, your marketing strategy, and your financial projections.
Thing to Consider
Before you start looking for funding, you should consider a few things.
First, think about how much money your startup really needs. It’s important to be realistic about your funding needs.
Second, consider what you’re willing to give up in return for funding. Investors will want a stake in your company, so you’ll need to be prepared to give up some equity.
You should also be aware that taking on investors means giving them a say in how your company functions.
Practice Caution
Not all investors are created equal. Some may be more hands-on, and others may have different agendas. It’s essential to research and choose an investor who’s a good fit for your company.
Have It In Writing
Before you take on any investors, make sure you have a well-written investment agreement in place. This agreement should spell out the terms of the investment, such as how much money is in play and what percentage of equity the investor will receive.
The agreement should include a provision for exit, which outlines what will happen if the investor wants to sell their stake in your company.
Don’t Count Your Chickens
It’s important to be patient when waiting for funding. Don’t spend the money you don’t have yet. This can put you in a difficult financial position and make raising the money you need harder.
Don’t Rely on Your Personal Network
Friends and family are often a good source of funding for startups. But you should only ask them for money if you’re confident you can repay it.
Asking for money from friends and family can strain your relationships, so make sure you’re prepared to make sacrifices if necessary.
Make Your Company Attractive to Investors
When looking for funding, making your business as attractive to investors and lenders as possible is important. You can do a few key things to make your business more appealing.
Create Your Business Plan
Investors want to see that you have a clear plan for how you will make your business successful. Your business plan should include information on your target market, marketing strategy, financial projections, and plans for scaling your business.
Improve Your Credit Score
Investors want to see that you’re a responsible borrower. They’re more likely to invest in a company with a good credit history.
Know the Numbers
Investors want to see that you have a good handle on your finances. They’ll want to see detailed financial projections for your business.
Hiring an accountant or accounting firm is one of the first moves you should make as a business owner.
Devise the Right Narrative
Your business story is vital for branding. It’s how you attract investors and customers and get them excited about your company.
I mean…who doesn’t love a good story? There’s a reason why the original Star Wars trilogy is one of the greatest stories ever told and the newest ones are disappointments at best.
Oh yes, it is, Mr. Jedi Master.
Think about what makes your business unique and why people should care about it.
Build an Investing Structure
Investors want to know how you will use their funds and what they’ll get in return. So have a clear investment structure in place before you start raising money.
There are a few things you need to consider when creating your investment structure:
– How much money do you need to raise?
– What are your goals for the funding?
– How will investors get their money back?
– What kind of return on investment (ROI) can investors expect?
Answering these questions will help you create an attractive investment structure for investors.
But the most important thing is never to give up on your idea. As outlined above, there are a myriad ways of receiving funding for your startup. Make sure to exhaust every avenue.
As we say in Italy, alterius non sit qui suus esse potest, which means: never give up, never surrender. This is a crucail mindset all start-up founders need to have.