If you’re planning on borrowing money to fund your business, you’ll also want to build your equity financing to balance out the amount you owe to others. You can do this by selling interest in your company, which will help ensure you have a healthy level of debt vs. equity.
We know that figuring out how to finance a startup business can feel overwhelming, especially when traditional business loans require one or more years in business. To help, we’ve put together a list of 10 alternative funding options for startups, including:
- Starting with personal financing and credit lines
- Reaching out to friends and family
- Applying for a business loan
- Catching the attention of an angel investor
- Pitching your startup to venture capitalists
- Hosting a crowdfunding campaign
- Joining a startup incubator
- Seeking out government grants and subsidies
- Applying for microlending
- Collecting pledges from peer-to-peer lending
To find out the best financial model for you, read through the next section:
1. Start With Personal Financing and Credit Lines
A personal credit line is a loan you take out with a maximum limit from a lender, like a bank. You can then access the funds in these lines of credit at any time in amounts that fit your needs, as long as they don't exceed the maximum you agreed to.
This can be a great option if your startup or new business needs cash fast to pay for everyday operations. However, if you do decide to take out a line of credit, you'll have to make timely minimum payments with interest. Before you shy away from this option, remember that sometimes you'll need to have skin in the game in order to advance your company.
Credit lines are the easiest way for small business owners to get startup funding as long as they have a reliable source of income, a good credit score and a positive credit history. Keep in mind that you can also get cash fast by borrowing from your 401(k).
2. Reach Out to Friends and Family
In the early stages of your startup, finding the right funding option can be stressful. Sometimes, the best option is to get financing from your friends and family.
Borrowing from them can often mean paying lower interest rates than compared to a bank. This can help reduce your overall debt level so you can put more cash back into your business. However, it's important to be aware that conflicts can arise over loans with friends and family.
3. Apply for a Business Loan
Another more straightforward option for financing your startup is to get small business loans. If you decide to get a bank loan, you'll need to get organized and know your credit history.
It's also important to be transparent as you work with lenders for a loan. They'll want to know exactly why you need it and how you plan to use it, whether it's for everyday expenses or to support your business’ structure. You can apply for a loan with:
- Banks: These are a good option if you have collateral, good credit and don't need cash immediately.
- Nonprofit microlenders: If you can't get a loan from the bank because your startup or company is too small, you can seek out smaller lenders to help.
- Online lenders: If you don't have collateral and need funds as soon as possible, you can look online for investors in startups.
- The Small Business Administration (SBA): Lenders that work with an agency help fund SBA loans. These lenders can often give you a longer time for repayment.
You can also get a business term loan. These can help pay for one-time investments for your operation. They're similar to student loans or a mortgage, offering repayment over a period of time in equal installments. You can get these loans from banks, credit unions and online lenders.
Before you request online financing, writing a business plan is a good idea. Your business plan should be able to offer information, like your:
- Financial numbers
- Growth plan
- Mission statement
- Products and services
- Company's leadership and team
4. Catch the Attention of an Angel Investor
These lenders are also known as private investors and can offer your startup the capital it needs to get off the ground, but it comes with a catch.
Angel investing works by offering you money in exchange for a stake in your company. This improves your chances of being successful, but you'll lose some control over your company. This is because angel investors will want to help make business decisions. They'll also receive a portion of the profits if you sell your company.
If this trade-off still sounds good to you, then your next step is to catch their attention. To do this, you'll need a clear business plan that outlines the market opportunity for your products and the potential for your company's growth. It's also important to be well-versed in your marketing and PR strategy, as well as your startup's financial numbers.
Some of the best ways to find angel investors can be through networking. You can also go through online services, like the Angel Capital Association, or use LinkedIn to find them.
5. Pitch Your Startup to Venture Capitalists
Venture capitalists are private investors that offer financing for startups or other small businesses. Typically, these lenders are partners in limited partnerships (LPs) and invest in one venture capital fund. A commission will then manage and make investment decisions for the funds.
If the group decides to back a startup, they'll give them money in exchange for a stake in the company's equity. These committee members usually look for startups that are ready to launch their products and have moved past the idea phase. This means if you're pitching to them, you'll want to:
- Understand their background: Research the priorities of the venture capitalist fund you're speaking with. This can help you focus your goals to align with theirs.
- Know your numbers: It's important to highlight your startups potential growth to investors. This includes what your cash flow and working capital are.
- Focus on your product benefits: You'll want to clearly communicate how your product can help potential customers.
- Promote your team members: Venture capitalists are looking for a team that will drive your startup to success.
- Analyze your competitors: You'll want to show investors what makes you better than other similar companies.
6. Host a Crowdfunding Campaign
Whether your working capital needs to improve or you need to increase your cash flow, hosting a crowdfunding campaign can help. These initiatives raise small amounts of money from a large number of people. In most cases, they're held online on popular platforms, like Kickstarter or GoFundMe.
Some tips for setting up a crowdfunding campaign include:
- Knowing your audience: You'll want to target a specific group of people interested in your startup or products before you begin spreading the word about your campaign. This can help you focus your efforts and use resources more efficiently.
- Promoting your campaign: One of the best tools for spreading the word is social media. You can also host an event to help publicize your cause and engage your audience.
- Picking the right platform: You'll want to research online sites that fit your industry and niche. This can help you find the right investors.
- Creating marketing materials: This includes using both digital and print to advance your initiative.
7. Join a Startup Incubator
Sometimes the best strategy for creating a business model for your startup is to work collaboratively. Startup incubators offer facilities and support to early-stage companies. While there, you'll get access to expertise, mentorship and the tools you need to succeed, like:
- Equipment
- Utilities
- Legal and accounting help
As you research and narrow down potential startup incubators, it's a good idea to interview other startup founders. They can give you a better feel for if you'll be a good fit or not.
8. Seek Out Government Grants and Subsidies
Free money for your business sounds like a dream, right? With government business loans and small business grants, it doesn't have to be. Many grants are only open to specific industries or demographics, though. This means some may only be for startups in science, technology or health fields. Others may be programs for women-owned startups.
Some grants also act as minority incentives for starting a business or focus on enterprise zones, which are areas where the government is encouraging development. Often, the government wants to offer incentives for new businesses to increase economic growth.
9. Apply for Microlending
If you don't qualify for a startup loan for new business, you may consider microlending. These are small loans that come from individuals rather than financial institutions. Like traditional loans, you'll have to pay interest, but these can get your startup the cash it needs to grow.
10. Collect Pledges From Peer-to-Peer Lending
Still not sure how to finance a startup company? Another option for borrowing without using a bank or credit union is through peer-to-peer lending. This involves accepting a loan from business people or investors. To start, you'll need to find a peer-to-peer platform, like:
- Funding Circle
- Lending Club
- Street Shares
These platforms can match investors with borrowers. Investors can then pick and choose which loans they want to fund.
Some of the benefits of peer-to-peer lending include:
- Lower interest rates, unless you have below average credit
- Fixed monthly payments
- Flexible use of the funding
Some of the drawbacks of peer-to-peer lending include:
- Borrowing limits
- Missed payments decreasing your credit score
- Not being able to qualify if you have a credit score below 630
