Nine start-up funding techniques that work in any industry
When starting a business, an entrepreneur faces many challenges. One of the biggest? Raising capital.
New technologies and platforms give entrepreneurs more options to raise capital than ever.
In the world of small business financing, there are:
1. Lenders (debt financing)
2. Investors (equity financing).
3. There are also a few non-lender, non-investor options, which we’ll talk about later.
All funding sources can provide you with cash you need to start or grow your business. But which is the better option for you?
1. Debt financing is borrowing money without giving up ownership. It usually comes with strict conditions, in addition to strict requirements, which can include paying interest and principal.
2. Equity financing is raising money by selling shares of your business to investors. Unlike debt financing, money raised through equity financing is not paid back in monthly installments with interest. Instead, investors become partial owners of your business, sharing in the profits.
Many favor the equity model because it does not take capital away from the business to pay down debt. The risk is distributed equally. Since you don’t have to pay investors back right away, you have more time to grow your business before your bills are due. If your business fails, you also won’t have anyone to repay.
Traditionally, small businesses in retail or manufacturing sectors opt for debt financing, while businesses in the technology or innovation sectors opt for equity financing, because they’re usually higher-risk and offer a better return on investment.
So, now that we’ve introduced the basics, let’s take a look at the specific approaches start-ups in most any industry can consider.
- Loans. As mentioned…a bank loan means regular payments, interest, and penalties for failing to meet requirements. A bank lines are usually hard to come by for young startup companies or companies that are engaged in service oriented businesses.
- Competition. The best leverage you can have is competition, so it’s wise to pursue as many alternatives as possible. When an investor sees you have others lined up, he’ll be more eager to contribute for the simple fact that if other investors are interested, the investment must be worthy.
- Self-funding. This process is common in a start-up’s early stages, as it demonstrates your commitment to future investors. Plus, it’s the only real way to maintain complete control. Many substantial companies were initially funded using personal credit cards and home- equity loans
- Crowdfunding. We’ve spent some time talking about this funding method in previous posts, Crowdfunding, Everything You Need to Know and Crowdfunding: Right for Your Business? It is helpful to know that crowdfunding can be rewards-based (where you maintain control), or equity-based. Aiming to introduce prospective customers to your idea from the get-go, crowdfunding also serves as a great marketing tool.
- Angel investing. An angel investor is a wealthy individual who invests personal capital in a company in exchange for equity. This form of investing has gained notoriety in the public eye thanks to the ABC show Shark Tank. Angels often come with a bonus—contacts, advice, and the mentorship of an experienced investor, which in some cases, proves to be more valuable than the funding itself.Reaching potential angel investors can be as simple as networking in the right places. Angels often expect a relatively quick return on their investment and may want more control over the direction of the company than you want.
- Venture Capital. Venture capitalists tend to invest in large growing markets, support new technology, and work with compelling founding teams. They’re actual companies, investing large amounts of other people’s money, so they tend to come with harsher terms.The term “venture capitalist” is often used loosely for any venture investor, but there can often be sharp differences. Besides capital, the advantages of working with a VC can include getting productive board members, guidance and expertise, access to experts, and media exposure. Many entrepreneurs prefer to take money from successful VC firms, because of the legitimacy it brings.
- Friends & Family. The good news is that friends and family will invest because they want to invest in you. The bad news is threefold. First, if the venture is not successful, it could change your relationship. For that reason alone, treat them like professional investors, carefully identifying all risks. Second, they may not be as connected as angel investors, and may not bring as much to the table in the form of contacts and business know-how. Finally, they may not be accredited investors, which can complicate matters in regard to SEC regulations, which define an “accredited investor” as someone with over one million dollars in liquid assets or an income of over $200,000 a year.
Per #3 above, here are two other funding methods that are neither debt- nor equity-based.
- Competitions. Entering competitions is another way to get funding and publicity for your startup, and can be a low-risk option that gets your idea in front of potential investors.Though the prizes are often relatively small, these competitions provide prestige, publicity, and a springboard for future funding.There are many of these competitions, most held annually, offering many different levels of prizes. Here are five examples:
- TechCrunch Disrupt is an annual conference hosted by TechCrunch in San Francisco, New York City, London and Beijing, aimed at technology start-ups.
- SXSW Accelerator Start-up Competition, held the same week as the renowned music festival in Austin, Texas, is for ideas, innovations, products and/or services.
- Huggies Mom Inspired Grant Program is for startups with new product ideas inspired by parents.
- Startup Challenge is an opportunity for prospective entrepreneurs, start-ups, and emerging companies to showcase their ideas and business concepts. The competition features cash awards and prizes in the form of legal and other services.
- Then there’s Shopify Build a Business. Entrants build an online store to sell their product or service and sales are tracked for a specified period. Then, the six start-ups with the highest sales embark on a five-day, all-expenses paid retreat featuring workshops with renowned entrepreneurs.
- Grant Funding. Focused startups can sometimes receive significant grant funding from a variety of sources:
- Uncle Sam. The Small Business Administration website’s “Access Financing Tool” can show you where to find government grants, as can the Catalog of Federal Domestic Assistance, which offers a full listing of all available federal grant programs.
- State Agencies. In various states, economic development agencies support small business through grant programs. Some are industry-specific. Again, the “Access Financing” tool on the BusinessUSA website can be helpful in finding grants to assist your business development.
- Special Segments. Some members of select minority groups are eligible for targeted grants that have been set-aside in their communities.
- Corporate Players. Corporate America has also made numerous grant programs available. Examples include Millers Lite’s Tap the Future business-plan competition, which offers $250,000 to aspiring entrepreneurs, and Walmart’s Local Giving Program, which awards grants ranging from $250 to $2,500.
Share your funding insights by commenting below. And if you’re looking for a solution to cash flow challenges, find out how MP Star Financial can help with a factoring solution suited to your business. Call 1-800-833-3765, ext. 150 today or email us.