7 of the Best Funding Options to Raise Capital for Your Startup
Starting a new business is rarely easy, and securing sufficient investment capital to get a startup off the ground can be a difficult task. Here, we look at seven funding options for to help you raise capital for your startup.
1. Traditional Lenders
Banks and other financial institutions can provide loans to cover various aspects of starting a business such as purchasing new equipment. If a bank declines an initial business loan application, there are other avenues available to explore, which include personal loans.
For entrepreneurs seeking investment in their startups, it is often prudent for them to approach institutions with whom they already have a relationship or account with and to make an appointment with a loan officer. If the applicant’s personal finances are in good standing and they have been with the bank for some time, this usually makes them a more attractive investment than someone with no history.
2. Family and Friends
Family and friends are the second-largest source of funding for startups. People who know and trust an entrepreneur are the most likely to believe in them and to see their potential.
Unlike traditional lending sources such as bank loans, family and friends rarely expect you to pay interest on money borrowed. However, there are risks to securing funding in this way. For instance, relationships are often damaged when someone fails to repay a loan. However, for some entrepreneurs, this can motivate and inspire them to carry on when they are tempted to give up. Similarly, concerns about letting a loved one down can also encourage you to persevere.
Crowdfunding is an increasingly popular way of financing new business ventures in the United States, UK and beyond. There are hundreds of crowdfunding websites to choose from, with some of the most popular in the US being AngelList, Fundable, CircleUp, CrowdFunder, and Kickstarter. These sites operate in a similar way, with some allowing entrepreneurs to raise funds from the general public and others relying on investors.
4. Personal Assets
While not everyone wants to dedicate their personal assets to their startup, this is how many entrepreneurs start out. The benefit of this is that because the business owner has funded the venture themselves, they have no responsibility to anyone else. For instance, if they do not need to sell shares in order to secure an investment, they will retain full control of the project. There will also be no investors to take a slice of the profits or bank loans to repay. Additionally, if entrepreneurs can avoid having to borrow from family or friends, they won’t have to worry about their personal relationships suffering if their businesses fail to turn a profit.
However, staking the contents of your savings account in a new business is a risky strategy. If the venture is unsuccessful, business owners might find themselves with few funds to fall back on. They might not only lose their business, but also significant assets or their homes.
5. Venture Capital
Venture capital funds are controlled by private equity investors with a keen eye towards identifying promising new ventures. They often invest in growing markets and new technology, normally for amounts of at least $1 million.
After venture capitalists invest in a company, they monitor its progress to facilitate business sustainability and the growth of their investment. In addition to financing, venture capital can help to provide expertise and mentorship to enable early-stage operations develop and thrive.
There are some caveats, however. Many venture capital firms don’t invest in startups, instead preferring prospective companies at later funding stages. They also expect an equity share in exchange for their investment and usually remain involved over a three- to five-year timeframe. During that period, some individuals might regret their lack of control over their business. Once venture capitalists recover their capital and profits, the business will no longer benefit from their expertise and will revert to the owners’ control.
6. Angel Investors
Angel investors are individuals with large sums of capital that they wish to invest in new business concepts. They operate alone or as part of a group and examine business proposals to find the right candidate for them.
As with venture capitalists, one of the distinct advantages that angel investment offers is potential mentorship. In comparison with venture capitalists, angel investors might provide less capital to fund business ideas, but are more willing to take risks on an investment when they anticipate a heavy return.
7. Grants and Government Initiatives
The US government administers numerous programs that offer capital to finance new startups. To apply for them, entrepreneurs must submit a business plan to the relevant grant committee. After examining the proposal, the committee will provide funding to launch the startup if they approve it. Government-funded contributions are usually substantial. This allows ventures financed in this way to carry over surplus capital to manage the business in its later stages.