You have a great idea, and you’re ready to start your own business. That’s awesome, but where will the funding come from?
After all, if you want to use that great idea and start your own business, you’ll need money.
So how are you to fund your dream business with your fantastic idea? This article breaks down seven ways that most business get their funding.
Tap into your savings, borrow from your 401(K), or keep your day job and use part of your paycheck to bankroll your startup until you can secure outside funding.
WARNING: Don't take it all. Keep an emergency fund in case a client doesn't pay on time, a pipe bursts and destroys equipment, etc.
Use credit cards to buy initial equipment and cover setup costs. You can buy some time & avoid interest charges by transferring the balance to other cards while you either wait for your first customers to pay, or secure additional funding.
WARNING: If you fail to get funding and can't pay off the debt in full, you're personally responsible for the balance -- and the interest payments.
Raise money without giving up equity. Crowdfunding is a great way to practice your pitch, get to know your audience, & tweak your product. And when it comes time to convincing potential future investors, you'll already have proof yours is a viable market solution.
WARNING: Don't get swept up in success stories. Unlike the Pebble Watch, most campaigns do not make 500X their fundraising goal. And because preparing and executing a campaign takes months, it can slow your timeline.
Instead of contributing for products or t-shirts, backers donate in exchange for equity in your company. Pitch to a large pool of potential investors, actively looking for new companies to back. Plus, platform posting requirements force you to have a viable business plan in place.
WARNING: You'll need a lawyer. There are a lot of regulations and legalities, and you'll need a private placement memorandum (PPM) for any offering you make.
Figure out your product and target market! This early investment help fledgling companies develop products, research target markets, & start building a user base. Funding options include bootstrapping, friends & family, angel investors, and crowdfunding.
3. Friends & Family
Without it, most VCs are wary. If friends & family aren't confident in your idea to pony up cash, why should they?
38% of startups get funds from their friends & family.
0.05% of startups get money from venture capitalist.
WARNING: Don't ask anyone to lend you money they can't afford to lose. And make it legal, so everyone knows exactly what they're in for. (Will you owe interest? Do the want equity? when do they expect to be repaid?)
4. Traditional Lenders
You're ready to scale up but haven't been able to secure additional capital. Come to the bank prepared with a thorough understanding of your company's risks, a working business model, & a high credit score.
WARNING: Banks are lenders, not investors. Your business needs to be established enough to show a track record of steady revenue, so they can be confident in your abilities to make payments.
This short-term loan can give your bank account a boost while you secure more funding, or if there's a set period of time -- say 90 days -- until your funding deal closes. It'll help cover the gap between when you'll run out of cash and your new funding kicks in.
WARNING: Be prepared for hefty fees & interest rates to compensate for the high risk nature of the loan.
Scale your product and define your ideal business model! Your company has momentum and may be generating revenue, but isn't yet profitable. Series-A funds growth, helping businesses extend their user base, scale geographically, or hire more staff.
5. Angel Investors
These accredited investors back companies in exchange for convertible bonds or ownership equity. They often band together in "angel networks," pooling resources and providing advice to the companies they invest in.
WARNING: Since they stand to lose their entire investment, Angels like a "sure thing," often opting for opportunities that will net a major return very quickly. Possible IPO or acquisition within 5 years is most attractive to Angels.
Conference rooms, etc.
Many also offer investment capital & support staff to help with finance, marketing, sales & strategy, plus established networks of experts to help guide major decisions.
WARNING: Because they have a vested interest in your success, Incubator staff want to be involved in decisions. And there's always the possibility they'll be at odds with your vision.
Scale your business! You have a good product/market fit and solid business model. Series-B funds business growth to hire marketing & sales people, further scale your customer base (e.g. move internationally), or buy out a competitor.
7. Venture Capitalist
VCs invests initial or growth capital for equity. Many VC firms also have specialist on staff to provide expert guidance to ensure their investment pays off. This can be helpful if you don't have much experience running a business & want help.
WARNING: If they have a stake, they'll want a say. VCs may want to have a member of their own team to your upper management, or approve any major business decisions you make.