How to Get Startup Funding as a New Business

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Financially bootstrapping your way into the business world is only practical if you have long bootstraps (significant personal savings) with which to begin. For any other first-time business owner, raising capital will become a full-time job until enough funds are secured to officially roll out your business.

This initial funding makes it possible to pay for everything you need in order to generate revenue. Fortunately, startup funding can be found from diverse sources, and it's not always necessary to have a perfect credit score or an incredibly unique business idea to attract the attention of investors or to get approved for a loan.

However, for best results, you should create a rock-solid business plan before approaching financiers. Most startup funding sources — including venture-capitalist firms, crowdfunding, bank loans, small-business grants and even friends and family — need to be convinced that giving you money is a good idea. They need to know that they'll either be paid back in full (plus interest) or that you'll deliver on your promises and manage your company so well that its value increases year by year. A business plan should answer all of their questions and assuage any doubts.

Once you have a business plan ready to go, it's time to research the best funding options for your business startup.

Seeking Out Investors and Venture Capitalists

Venture-capital firms exist with the sole purpose of funding startup companies. However, venture capitalists are quite picky about the business ideas they support. The business model of a VC is to invest money in your small business by buying a share of the business. Then, they rake in profits as the value of your business grows and they cash out their share.

Venture-capital investments may be difficult to secure in the early stage of a business. That's because some VCs try to minimize their risk by investing in startup companies that already have some sort of foundation but just need a little extra push. If you have prototypes and are ready to launch your first aggressive advertising campaign, a VC may be willing to provide funds. However, if the VC won't see a return on the investment for several years because you're still in the product-development stage, they might pass.

Individual investors are another option, and depending on their interest and confidence in your business idea, they may be willing to fund your startup in the early stages. Angel investors in particular are wealthy individuals with an interest in a particular niche. For example, according to Inc., angel investor Keith Rabois is interested in "loyalty programs, education, IT, sports and marketplaces." He's probably not one to approach regarding a new agricultural product, but another angel investor named Dave Morin does like the agriculture niche and would be worth pursuing.

Investigating Your Loan Options

For more traditional funding options, research the various types of small-business loans that are available through banks, credit unions, nonprofit foundations or the Small Business Administration. Microloans are typically considered anything under $50,000, but you can secure larger loans based on your credit score, business plan and general business credentials.

Loans can be difficult for new business owners to secure without collateral. Expect to use any assets or private equity you have as collateral for a bank loan in particular. Lenders also perform due diligence on loan applications to decide whether giving you a business loan is worth the risk. A history of other successful business ventures, experience as a business professional, good business credit or personal credit and a well-thought-out business plan will increase your chances of being approved for a traditional loan.

If any of these parameters are not in your favor, consider seeking small-business grants or loans through a nonprofit foundation such as the Draper Richards Kaplan Foundation. These organizations also want to minimize their risk, but they understand that some people haven't yet had a chance to build credit or prove themselves as a successful business owner. Whatever kind of loan you receive, be sure you can afford to make monthly payments right away.

Applying for Business Credit Cards

Credit cards give you a line of credit into which you can dip as needed for virtually any aspect of your business. Approval is also relatively easy as long as you have a decent credit history, which means you can keep this funding option on the back burner if you find yourself over budget and in need of quick additional funding.

You can also find cards with cash-back rewards and other reward systems. Business cards do have their drawbacks, however. Some cards have an annual fee, which can run around $100 or more, but others, like the Brex Corporate Card for Startups, have no annual fee. Be sure to pay attention to the interest rate and any penalties associated with late payments before you sign up for a business credit card.

Personal credit cards make sense for sole proprietors or self-employed individuals, but it's still wise to get a separate card that you use only for business expenses, even if it's not technically called a "business credit card."

Turning a Solo Venture Into a Partnership

If someone approached you about your business and pitched the idea of becoming your cofounder, mentor and major financier, how fast would you sign the paperwork? It would be a dream come true for many entrepreneurs. However, having a partner means relinquishing some of the control over your business decisions. Your startup is your baby, and it can be tough to cooperate with someone else's vision, even under a mentorship.

However, having the financial backing of a seasoned business professional — and one who is willing to mentor you to boot — may be worth swallowing your pride. You'll need to do the legwork to find your cofounder, however. She is unlikely to call you and beg you to take her money.

Finding a business partner is a little bit like dating because you need to make sure you can both work well together through thick and thin. Start networking at conferences or online via social media or niche forums but don't bring up the "P" word right away. Find someone with whom you truly click and who doesn't bulldoze all of your decisions. Then, suggest the possibility of a partnership in which much of the funding is provided by the partner in exchange for co-ownership of the business and its profits.

Using Crowdfunding Platforms

Most other funding options for a small business involve getting a large sum of money from a single entity. Crowdfunding platforms flip that formula onto its head and allow startup founders to collect small contributions from a large number of people. This source of funding works best for businesses pitching a global product. Services or highly localized products (such as city-themed T-shirts) will not garner as much attention because they're irrelevant to many platform users.

Popular crowdfunding sites include Kickstarter and Indiegogo. In theory, you could also set up your own crowdfunding campaign on your website, but established crowdfunding platforms have their perks. For example, your campaign could potentially be promoted to the platform's homepage or social media sites, getting more eyes on your project and encouraging more donors. In addition, donors have come to trust these platforms because the money they pledge is not withdrawn from their bank account unless the campaign reaches its goal.

Of course, crowdfunding platforms need to make money too. Expect a certain percentage of what you raise to be taken by the platform as a service fee. Although the money you've raised does not need to be repaid to donors, you'll need to pay taxes on it unless your new startup has tax-exempt status. Factor these details into your final financial goal so that you don't end up short on funds.

Asking Friends and Family for Startup Funding

Your friends and family represent your biggest supporters. They know better than anyone that you're capable of running a business, and they definitely want to see you succeed. There's a chance your family or friends will frown on you for "asking for money," but if you treat them with the same respect you would give an investor, they might hear you out. Present your business plan to them (it's great practice even if they don't have money to offer you), and you might be pleasantly surprised with a check.

To further ensure that this doesn't cause a problem with your relationship, write a promissory note to any friends and family who give you startup funding. This note describes your intention to pay the person back by a certain time and with a certain amount of interest. It's legally binding, so be sure to keep your word.

Using a Home Equity Line of Credit

A home equity line of credit lets you use your home as collateral for a line of credit. If your home is valued at $200,000 and you have paid $50,000 of your mortgage, that means you have $50,000 in home equity into which you can dip by opening a HELOC. You then make monthly payments to repay what you use as you use it with a flexible and often low interest rate.

A HELOC is nice to have because it can act as an emergency fund. You know the money exists and that you can use it if you need it, even if it's for something relatively small for which you simply forgot to budget, like buying a generator for your shop. If you know you need more of a lump sum all at once, consider HELOC's cousin, HEL. A home equity loan still uses your home as collateral but turns your home equity into a larger loan, often with a fixed interest rate.

Applying for Startup Funding

Once you have your business plan ready to go and have practiced presenting it to an audience a few times, it's time to submit your funding applications. Just like submitting job or college applications, it's smart to apply to more than one venture-capitalist firm or for more than one grant or loan at once so you don't waste time waiting for a response before sending out the next one. Applying does not mean anything is set in stone but merely expresses your interest.

In the worst-case scenario, all of your applications will be rejected, in which case you can explore other options, like crowdfunding or a HELOC. In the best-case scenario, you'll have multiple offers to review. Be sure you only take on what you can confidently afford to pay back, and you'll finally be able to move on to the more exciting part of owning a business: Putting your plan into action and seeing your vision come to life.

References

About the Author

Cathy Habas specializes in marketing, customer experiences, and behind-the-scenes management. Cathy has contributed to sites like Business and Finance, Business 2 Community, and Inside Small Business. She served as the managing editor for a small content marketing agency before continuing with her writing career.