New businesses have the responsibility to obtain funding to support their business before their revenue can cover operations costs.
However, it can take months before a new company can break even and profit since the startup costs for a new brand are hefty. You may be left wondering how to raise money for a business if you start your own company.
Whether you decide to start your business with your personal savings or apply for a small business loan, there are many financing options to raise capital for your startup and lead your business to success.
Keep reading to learn about a variety of business funding options to ultimately seek business capital.
Table of contents
- Try bootstrapping your business
- Launch a crowdfunding campaign
- Apply for small business loans
- Accept donations from friends and family
- Use personal assets
- Appeal to angel investors
- Consider investment from venture capitalists
- Look into microlending
- Try purchase order financing
- Do a product pre-sale
- Enter a contest
- Partner with another business
- Consider an incubator program
- Apply for startup accelerators
- Research alternative lending
- Business funding FAQs
- Tips on raising capital for a startup
- Wrapping up: takeaways on business funding
1. Try bootstrapping your business
Funding your business venture is often called bootstrapping since the entrepreneur is the initial source of funding.
It’s an excellent business fundraising opportunity for industries that don’t require a large amount of startup capital, such as e-commerce or other online business models.
- Pros: Bootstrapping can help businesses avoid debt from bank loans or business credit cards that can negatively impact credit. It can also provide greater control within your company since investors typically want a say in business operations.
- Cons: It’s important to note that bootstrapping can risk your personal funds or even affect your credit should your business go bankrupt. Bootstrapping can also result in slower growth since you may not have the budget for marketing if your business is focused on the product or service.
2. Launch a crowdfunding campaign
When businesses raise money through a crowdfunding campaign, they ask large groups of people to make small personal investments to raise funds for their company’s startup costs. Some of the top crowdfunding sites include Indiegogo, SeedInvest Technology, GoFundMe, and Patreon.
- Pros: Crowdfunding has many benefits, such as a wide range of investors and the ability to generate excitement and brand awareness for a new company. It can also help entrepreneurs gauge interest in their product or service to see if the business is worth starting.
- Cons: Since investors want to know where their money is going, businesses looking to crowdfund will need a great elevator pitch for their business as well as a business plan with future income projections. Investors in any form need to be sold on your product or service.
3. Apply for small business loans
One of the most common ways new businesses fund their initial operations is through loans from the Small Business Administration (SBA).
Most small business loans require you to be in business for two or more years, present strong annual revenue that amounts to at least $100,000, and have a credit score that is 640 or above. However, the requirements for small business loans do vary depending on the lender.
- Pros: Small business loans come in many different varieties, from microloans of $50,000 or less to 7(a) loans, which is the SBA’s most common loan program. What’s great about these types of loans is that they provide funding in a lump sum instead of increments over time.
- Cons: Similar to any type of loan, some businesses may not be eligible, and if they are, they might have high-interest rates and a strict repayment plan. That’s not to mention the processing fees, the possibility of not being approved for the full amount, or the extensive application process.
4. Accept donations from friends and family
Another option for entrepreneurs who want to avoid debt is to raise money through their friends and family by asking them to make donations.
Taking advantage of your personal network is the way to go if you have people in your circle who support and believe in your business idea.
- Pros: Raising money for your business through friends and family has its benefits: You’ll know exactly where your money is coming from and your personal network will likely be less strict than investors or banks when it comes to repayment or interest rates.
- Cons: Mixing business and personal matters could pose potential problems, and you will need to be tactful in navigating your relationships.
5. Use personal assets
Buying or leasing business equipment can make startup costs expensive, so utilizing personal assets like furniture and technology you already own can help you save money in this sector of your business.
Similar to bootstrapping, entrepreneurs can use what they already have to make their business venture a reality.
- Pros: Using personal assets for your business can help you save money on fees and interest that come with loans and give you more control over your business decisions since investors typically want jurisdiction over such matters.
- Cons: Much like bootstrapping, using personal assets can affect your personal credit or put your assets at risk. It can also result in taxes or early withdrawal penalties when borrowing money from a retirement account.
6. Appeal to angel investors
Many startups fund their business with the help of angel investors. These are private investors with a high income and net worth that allow them to make significant investments in the early stages of a startup. Some angel investors work independently, while others invest in groups of angel investors to maximize their impact.
- Pros: Obtaining funding from angel investors has benefits such as the lack of risk to your personal assets, the investor’s knowledge and business contacts, as well as no repayments or interest on the funds they provide.
- Cons: When angel investors fund your company, you give up a certain amount of control since they want to be involved in many business decisions. It can also take a while to find a suitable and willing angel investor, considering they can offer so much to potential businesses.
7. Consider investment from venture capitalists
A venture capitalist is an investor who works at a private equity investment firm and provides funding to businesses with high growth potential. What they ask for in return is an equity stake in the company.
Venture capitalists make money through management fees and carried interest. Management fees cover the cost of managing business assets, while carried interest is the share of profits given to the venture capitalists.
- Pros: Venture capital business funding has many advantages since the money they provide is yours to keep and doesn’t require repayment. Venture capitalists can also connect you to a larger network of business leaders and can help your business grow quickly.
- Cons: Venture capitalists have a stake in your company and therefore reduce the number of shares you hold and how many you can sell to other shareholders.
8. Look into microlending
Loans that are valued at $50,000 or less are referred to as microloans. They are specifically useful for entrepreneurs looking to finance their businesses without borrowing from a bank or credit union.
The interest rate for a microloan can range from 5% to 20% and is typically repaid in monthly installments. The SBA has a microloan program, but platforms like Kiva also offer microloans to small business owners.
- Pros: Microlending allows for smaller amounts of money to be borrowed, reducing the amount of interest that would incur from a larger loan. Some lenders may also offer shorter payment periods and lower interest rates.
- Cons: Although microlending creates less debt than a traditional loan, you will still owe money. Online microlenders are also unlikely to lend to new businesses and startups, so this is a better option for established businesses.
9. Try purchase order financing
It can be challenging for businesses that sell products to pay for inventory if the customer hasn’t bought the product yet, which leaves the company to front the cost.
Purchase order financing is when a purchase order financing business pays the supplier to produce what you sell. Once the product is made and sent to the customer, your business receives payment and pays the purchase order financing company.
- Pros: Purchase order financing is an excellent option for businesses that have large product orders but lack the cash to cover the cost of production until the customers pay them. This method is quick and efficient in getting the products made and shipped to the customer without worrying about up-front production costs.
- Cons: This business funding method isn’t affordable for most small businesses and it can take a while for them to actually make a profit since their main priority would be repaying the purchase order financing company.
10. Do a product pre-sale
Preselling is when you put a product that hasn’t been made yet on sale for customers to purchase in advance. This may seem confusing, but it allows entrepreneurs to gauge customer interest in their product and ultimately test out their product idea on the market.
Thirty-five percent of startups attributed their failure to the lack of market need for their product, making product pre-sales a great tactic to predict how well your business will do in the future.
- Pros: Some of the numerous benefits of conducting a product pre-sale include the assurance that there is a market demand for your product, a better chance of success as a business, and finally, the fostering of customer relationships.
- Cons: Selling customers on a product that doesn’t exist yet is difficult and may prove to be implausible for some businesses. It also may be expensive to create the product, and consequently, it may take longer for the product to reach customers.
11. Enter a contest
There are many small business funding contests that can offer thousands of dollars in business funding for your company. Small business grant contests are a cost-effective way to raise capital for a business without accruing debt.
- Pros: Most companies that offer these grants have few conditions for the types of eligible businesses and only have a few application requirements to enter.
- Cons: Winning a small business grant can be very difficult, given how competitive the small business landscape has become and how many entries are allowed per applicant.
12. Partner with another business
Business partnerships between brands are a useful tool to garner attention and interest in a new company. Partnering with a business that has a similar mission and values as yours can help both companies succeed and raise awareness among potential customers.
- Pros: Both businesses gain more attention in the public eye and create a lasting relationship for future collaboration opportunities.
- Cons: This may be more difficult for newer companies since they are less established than brands that have been around for a while.
13. Consider an incubator program
Business incubators are companies that aid startups or entrepreneurs in their business development efforts through the services they offer. This option is more common for industries like software development and knowledge-based professions.
Incubators come in the form of academic institutions, nonprofit organizations, for-profit ventures, and venture capital firms. To be enrolled in an incubator program, businesses or entrepreneurs must apply, be interviewed, and receive an acceptance offer from the program.
- Pros: Business incubator programs offer a wealth of benefits, such as providing resources for the business to grow, mentorship and networking opportunities.
- Cons: These types of programs can be highly competitive, although not as competitive as startup accelerator programs. The application and interview process can also be lengthy.
14. Apply for startup accelerators
Much like a business incubator, startup accelerators provide mentorship and educational benefits to new businesses looking to grow in the early stages of their creation. They are a fixed-term commitment, meaning there is a set time for the accelerator program.
Also known as seed accelerators, these programs typically operate in cohorts, so there are many startups that are seeking growth through the program at the same time.
- Pros: Startup accelerators are known for their superb networking opportunities, personal guidance from experienced entrepreneurs, and collaboration with other startups in your cohort.
- Cons: Some disadvantages of accelerators are the 3-to-6-month program length, making the whole process very intense. In comparison, business incubators can last anywhere from 1 to 5 years.
15. Research alternative lending
Alternative lending is any loan that you secure from an institution that isn’t a traditional bank. These lenders are known for being more accessible than banks and offer an online lending process that takes care of underwriting for you.
If loan requirements like your credit score or annual revenue are preventing your business from acquiring a traditional loan, this may be the option for you, given the flexible nature of this funding source.
- Pros: Alternative lenders are more flexible than traditional banks since they are more likely to overlook strict loan requirements.
- Cons: Because alternative lending companies are online, there aren’t in-person options for borrowers. This type of funding also has fewer options to choose from since they don’t involve a bank or government entity.
How to fund a business FAQs
Tips on raising capital for a startup
It may seem easy enough to apply for a small business loan or set up a crowdfunding campaign, but the likelihood of success in fundraising depends on how you go about raising capital for your startup.
With these tips, you can ensure that your business will get the funding it needs in order to maximize profits and keep debt down.
1. Do your own accounting
Keeping track of where your money is going and the financial habits that your business is picking up can help you analyze better ways to utilize business funds. Internal bookkeeping is fundamental when it comes to financial planning.
2. Solidify your pitch
To get funding, new businesses need to have a strong pitch that will encourage lenders or donors to invest. It’s no easy task to convince angel investors, venture capitalists, or even family members to fund your business idea.
3. Consult peers in your industry
Talking to other entrepreneurs who sought funding for their business can help you with funding your own business. This is what makes business incubators and startup accelerators so attractive: The mentorship and guidance from experienced entrepreneurs is invaluable.
4. Use your credit
Business owners with good credit have the option of opening a business credit card to help cover the cost of starting their business. However, it’s vital to avoid large amounts of debt since this can negatively impact your personal credit score.
5. Perfect your business plan
Much like having a solid pitch, your business plan must be comprehensive enough to give investors or lenders the confidence that your business will succeed.
Wrapping up: takeaways on business funding
There’s no right or wrong way to fund your business, but there are various tactics that minimize overhead costs and make breaking even a whole lot easier. If one method of financing doesn’t pan out, there are plenty of other options for business owners to try.
With fewer barriers to entry when it comes to structuring a business, establishing a successful company has never been more promising.