Businesses don't appear out of thin air. They happen because somebody invests some money.
There are a lot of options for financing a startup or small business. From funding your new venture all by yourself to working with angel investors, each option has pros and cons.
Today we're going to tackle the different options-- the good, the bad, and the ugly – to help you decide which option is right for you.
If you can swing it, self-funding, or bootstrapping, is the best option. The costs to start a business are at an all-time low, and the vast majority -- 82% -- of startups are self-funded.
The biggest advantage is that you don't have to give up any control or equity in your new company. For many people, this validates the potential drawback of how long it may take to save money to get started and grow.
Many businesses started out bootstrapping their way through the early stages. Giants including Apple, Coca Cola, and eBay were all started by bootstrapping entrepreneurs. Even smaller firms like Bear Naked Granola and TechCrunch (and Grasshopper!) began with bootstrapped funding.
Everyone. Bootstrapping is always a good idea, but it's particularly great if:
Your business has exceptionally low costs to start
You're working with a co-founder or a few
You want to maintain all of the equity and control in your business
To get going with boostrapping, start here.
Friends and Family
If bootstrapping your startup isn't an option, turn to your family and close friends. There are few people in the world more likely to support you than those who know your drive, so they're the perfect place to start.
When you draw funding from family and friends, you can likely still retain all of your business' control and equity. However, the amount of funding that you can raise may still be pretty limited. There's also a risk here of complicating relationships and blurring the work-life line.
About 24% of companies found funding through family and friends in 2014. Most of these companies use friends and family as a component of their financing plan, seeking other forms of funding as they grow.
Small ventures that won't require a ton of capital
Keeping control and equity for yourself
Entrepreneurs with big families!
When you need a little more funding than yourself or your family can put together, another awesome option is crowdfunding. If you're not familiar, crowdfunding allows you to collect donations and pre-orders from groups of people on the internet.
A new idea, crowdfunding is still evolving, so you may or may not be dealing in equity and control. There are tons of platforms for crowdfunding startups like:
Fundable – Geared more toward small business, it's the largest business platform
Smallknot – Takes crowdfunding to the local level, to the benefit of the smallest and microbusinesses
Kickstarter – A home for creative projects from films and music to technology
Indiegogo – A more general place for all types of inventors, musicians, etc. to get their projects funded
Some of these sites are better suited to different types of businesses and needs, so if you need help choosing, take a look at what other people are saying about them:
Kickstarter vs. Fundable | TechWars
Crowdfunding Sites | CrowdsUnite
Crowdfunding only accounted for about 3% of startups last year, but this number promises to grow in the coming years. Since it got its start in 2012, crowdfunding became a $5.1 billion industry, raising $2 million every day.
Startups that need more capital than family and friends can supply
Maintaining control and equity
Creative projects, nonprofits, social ventures
Startup Competitions and Grants
Another option is to compete with other startups and small businesses for awards, competitions, and grants. Startup competitions are springing up just about everywhere, and you can find a bunch on our Startup Competition Guide.
These are opportunities for you to compete based on your pitch, business plan, or other aspects of your business. You can win all kinds of cash and in-kind prizes, and you're likely to also get some publicity.
You probably won’t be funding your entire venture with startup competition prize money, but winning these competitions has launched some pretty successful companies like Dropbox, Mint, and GoldieBlox.
You can also apply for government grants – which are about as close to free money as you can get – so naturally, competition for them is fierce. You can search for all kinds of federal grants here.
Innovative technology ventures
Startups that have launched and shown proof of concept
Entrepreneurs with nothing but a dream and a pitch
You can also secure a loan or loans to help you fund your small business. The biggest drawback to loans is simply that you’re incurring debt. When you’re just starting out, that can be both dangerous and scary.
Aside from debt, a loan can be a great option for financing your venture, especially a small business loan. But be aware – even though the economy is rebounding, banks are still playing their wallets very close to the chest, and first-time entrepreneurs may have an uphill battle securing a loan.
A lot of small businesses are funded this way, through loans, credit cards, and lines of credit – as many as 41% of startups, actually.
Serial entrepreneurs with a history of starting successful businesses
Entrepreneurs with great credit and/or existing assets to use as collateral
Ventures that require a larger amount of capital to get started
Angel Investors and Venture Capitalists
If none of the previous options are for you, then you can also turn to angel investors or venture capitalists. Angel investors and venture capitalists are very similar – they provide a (usually sizable) sum of capital, often in exchange for a chunk of equity in your business (also usually sizable).
Venture capital and investors aren’t a very common source of startup funding. Barely 1% of small businesses are financed this way.
Part of the reason for that involves startup costs and entrepreneurs' willingness to give up equity and control. It's also very difficult and competitive to secure these investments.
If you're interested, you can find angel investors and venture capitalists in these places:
Choosing to work with these investors entails both good and bad. Funding your venture this way means you'll probably receive some mentorship and guidance in addition to capital – it's more of a partnership than the other options. However, that also means giving up a notable amount of equity and relinquishing at least a little bit of control.
Don’t forget: a huge influx of cash doesn’t guarantee a successful business.
Ventures requiring larger sums of capital
Entrepreneurs seeking a more partnership-esque funding arrangement
Those willing to cede some equity and control
All of the choices we listed come with their own unique benefits and drawbacks, so it's important to do your research and weigh your options. Choosing the right financing plan for your startup will ensure you have the resources you need to put your small business on the map.
What are your concerns for funding? Which of these options seems best for you?