It takes money to make money. While that saying is a cliche, it still definitely applies to startup businesses. After all, you need time to build your sales and during that stretch you still need to hire staff, stock up on inventory and equipment and pay yourself a small salary.
According to the 2019 Small Business Credit Survey conducted by the Federal Reserve banks (which includes 6,614 responses from small employer firms with 1–499 full- or part-time employees in the U.S.), 43 percent of businesses applied for financing in 2018. Raising money is all part of growing a company—you just need to look in the right places. To help with your search, read on to find some of the types and sources of funding, along with how they compare.
Ways to Raise Funding for Business Startup Companies
1. Business Loans
With a business loan, you borrow a lump sum of money that you'll pay back over time with interest. When you borrow, you don't have to give up any ownership in your company. However, the lender may ask you to put up collateral, like your equipment or personal savings. If you don't pay off the loan, the lender could take this collateral.
2. Lines of Credit
A line of credit is like a loan that you can reuse. The lender gives you a maximum borrowing amount, and you can take out any amount of cash up to this point, pay it back with interest, then borrow again in the future without going through the application process again.
3. Equity
If you take on investors for your startup, they will give you cash in exchange for equity in your business. This means they take on a percentage ownership of your startup and will get to share in your future profits. They also share in the risk, so if your company goes bankrupt, the equity owners can't go after your personal savings.
4. Grants
Grants come from the government, nonprofits and charitable organizations looking to support business owners. If you qualify, you receive free money that you don't have to pay back, without giving up any of your company. Sounds ideal—but qualifying can be challenging and time-consuming, so grants shouldn't be your only source of funding for business startup costs.
5. Crowdfunding
Crowdfunding combines the money from many people to make a sizable investment in a company. There is crowdfunding that sets up loans (P2P lending), crowdfunding to find investors and crowdfunding where you raise money just because people want to support your company. For example, after seeing your prototype, people can give you money so they are first on your customer waiting list.
6. Bootstrapping
Finally, you can try bootstrapping your startup. This means you cover the initial costs out of your personal savings and your personal credit cards. One benefit of using your credit card is that it can earn rewards that you could put towards your business.
Where to Find Startup Business Financing
1. Banks and Credit Unions
Traditional lenders like banks and credit unions tend to have tough standards for startup business financing. You may need an established credit score, business plan and collateral to qualify. These lenders also have a longer application process, which can take several weeks for a decision. However, if you do qualify, their loan interest rates can be more competitive than other lenders.
As you continue to grow your startup, you may need to rely on multiple types of business finance. By understanding how they all compare, you can create the combination that best funds your business.
2. Online/Alternative Lenders
Besides the bank, there are also alternative and online lenders. They can process loans more quickly and can have easier standards, and you may qualify just by showing your business is making revenue. However, their interest rates are typically higher than what a bank would charge. For help comparing the cost of different loans, you could use a business loan calculator.
3. Credit Card Companies
If you have a credit card, you could use that to cover your initial costs. The company may also offer loans, lines of credit or other options to fund your business. For example, they may prepay your suppliers. Your chances of qualifying with the credit card company may be high, thanks to your existing relationship.
4. Angel Investors
Angel investors are wealthy individuals looking to put money in startup businesses. Depending where you live, you can find local angel investor groups. Investors are usually more willing to take risks than lenders because they are sharing in your company's profits. In addition, angel investors can serve as advisors to help your company.
5. Venture Capital Funds
Venture capital funds are professional investment firms looking to put money in startups. Since they are a professional firm, they can make larger investments than angel investors but their standards are also typically tougher.
6. Friends and Family
People you know personally might also lend or invest in your business. Since they know and trust you, you probably won't be held to the same strict standards as you would with a professional lender. On the other hand, you need to treat the arrangement carefully so you don't damage the relationship, or your business. Make sure to treat everything formally and set up a signed legal agreement.
7. The Small Business Association
The Small Business Association is a government resource for helping your startup raise money. They offer a program where, if you qualify, they'll partially guarantee a loan with a bank or other lender to improve your chances of qualifying. Beyond that, you can check with the SBA for help finding grants.
8. Nonprofits
There are nonprofits and other organizations looking to support businesses run by underrepresented groups like minorities, women and veterans. If you meet their criteria, they offer loans and grants.
9. Crowdfunding Websites
There are various websites for different types of crowdfunding, including P2P lending, equity, raising money based on customer interest, and more. If you think your business is match for crowdfunding, you can launch a campaign on a crowdfunding site.
As you continue to grow your startup, you may need to rely on multiple types of business finance. By understanding how they all compare, you can create the combination that best funds your business.
Photo: Getty Images
