If you come from nothing, achieving success in business is not all about having innovative ideas and a creative team around you. It’s also about finding a way to get the business up and running, and this is usually quite expensive. There must’ve been thousands of amazing ideas out there that haven’t come to reality because there was nobody to recognize them and help with the seed funding. When this happens, you might be tempted to risk it all, take a loan and hope for the best. If you really believe in your idea, this is a reasonable way to finance your startup in the initial phase. However, you have other alternatives. Here’s a quick overview of the most common funding options for new businesses.
Venture capital (VC) companies and funds search for still undeveloped businesses with great potential that need financial help. These funds are raised with the help of numerous companies that expect their investment to pay off eventually. So how does this work?
If they think your idea has potential, venture capitalists will invest in your business to help you out, and in return, they will normally expect to become shareholders as well as to get involved in decision-making. They’re basically buying a percentage of your future income, hoping that your business will develop with their help. On the one hand, you’re not expected to give the money back, but on the other hand, you’re sacrificing your independence and full control over your firm. This can turn out to be quite a problem, since investors are usually anxious to see results quickly and will sometimes make decisions that don’t benefit the startup in the long run. This happens especially if they don’t really understand your ideas nor your industry, which is the case more often than you might think.
The way angel investors help you to get your business up on its feet is very similar to the way venture capitalists do it. These investors are individuals, usually connected in networks, who invest their own money in promising businesses. A huge advantage of both of these modes of financing is that investors are usually also entrepreneurs, who can often help you out with their experience and contacts, even when they’re not too familiar with the hottest trends in your industry. Angel investors also expect shares and control in return for their money. They can, however, be more flexible when it comes to specific financial arrangements, since they’re investing their own money, which is not the case with venture capital funds.
A big advantage of the first two financing methods is that, simply put, you’re not expected to pay the actual money back to the investors, no matter what happens to your business. However, losing your independence may be costly in the future. Thus, taking a loan to help you start is sometimes a better option.
However, getting a business loan from a bank might be a hassle for newly emerging startups. Banks are keener to approve loans for already developed companies that can present a solid and reliable plan for the future. They’re not that much into risky business and companies without a good history and a high credit score. Therefore, if you’re looking for small start up business loans, then turning to alternative options such as loan companies might be a good idea.
Non-bank lenders will usually be much more flexible when it comes to your financial history and credit rating. Going this way means less paperwork and less waiting for the loan to be approved. If you’d still rather stick to banks, but you’re not eligible for a business loan, then you can also consider taking a personal loan. Your business history is not important in this case, so if you have a good personal credit score, then you’re all set. Nevertheless, always be careful with mixing private and business funds, as it might pose a problem in the later stages of your startup’s development.
Crowdfunding is an increasingly popular option when it comes to financing new businesses. Basically, you present an idea on a crowdfunding website or platform and look for people who are ready to help your idea come to life. It has two big advantages, the first one being the possibility of reaching your future customers and audience right away. In addition, if your concept gets a bit of attention, it could attract other private investors ready to help you out. Getting all the funds you need through crowdfunding is very difficult, especially if you need a lot of money to start your business, but it’s always worth trying.
Whichever of these funding options you choose, keep in mind that getting the money is never simple and it might take a bit of patience. And when you manage to pull it off, don’t get too carried away, since you’re still at the very beginning and it’s just the first of many challenges you’ll face. Finding seed money is not the end of your battle, it’s just the starting point of a long and demanding trip to success.