Relying on traditional business loans is difficult for a startup. Business loan requirements favor established businesses, but non-traditional funding sources can seem complicated or more involved. However, to ensure long-term viability, it’s important to know how to use these channels to secure funding for your new business.
What you need to know
- Startup owners who find it difficult to secure a traditional business
loan have many other funding options, such as venture capital, crowdfunding, grants, incubators, and more. - Unlike business loans, these other funding methods require you to make a pitch, detailing a plan, vision, and mission for your business.
- Equity funding can provide a significant capital boost, but requires you to give away some of your ownership stake.
Broaden your funding horizons
Startups can burn through a lot of money while establishing revenue streams. If this is your first business venture, you won’t yet have a high enough business credit score to qualify for business loans. Traditional lenders may approve some loans to cover startup costs, but these rarely offer enough to sustain a growing business.
If you have a low business credit score, you may have to rely on venture capital or other forms of equity funding as secondary funding sources. This can come from venture capitalists or angel investors, crowdfunding, grants, or incubators.
The path of equity funding
The main disadvantage of equity financing—investment received in exchange for shares—is that you have to give up a percentage of your ownership stake to acquire it. However, securing this early funding from a venture capital firm or angel investor can significantly boost your startup.
Equity funding is raised in several rounds. The first round is called a seed round, and is when you acquire startup financing. A typical path after that is to do up to three more rounds (Series A, Series B, and Series C) and potentially an initial public offering (IPO) in which you’ll sell stock in your company to the general public on a stock exchange.
Equity investors come in two main types. A venture capitalist (VC) usually works for a firm and becomes a business partner when they invest in your company. An angel investor is usually an individual and remains more independent, though they’ll sometimes request a board seat.
The key to success with equity funding is not to give up too much equity in your fundraising rounds. For example, surrendering 40% of your ownership stake in the seed round leaves you little to offer in later rounds.
Build a compelling investment proposition
While lenders look at metrics like financial projections and business credit scores, investors want to be convinced by a reliable business model, value proposition, and authentic mission—use these as the foundation of your pitch deck.
Effective crowdfunding
Crowdfunding involves receiving many small investments from a large pool of lower-net-worth investors. One benefit of crowdfunding is that you won’t need to surrender any ownership stake, but you will need to find many more individual investors. GoFundMe, Kickstarter, and Indiegogo are common platforms for launching crowdfunding campaigns.
Typically, businesses incentivize funding by offering their product or other rewards to investors, but you’ll first need to develop a pitch and brand strategy directed at a wide audience.
Grant opportunities for startups
The benefit of grant funding is that you don’t have to give up ownership or repay the money like you would with a loan. Unfortunately, grant money is limited, and the applicant pool is large.
There are both government grants (from the Small Business Administration or other federal and local agencies) and non-governmental grants (from private foundations or organizations) for small businesses. Review eligibility criteria and guidelines for each grant, and write a strong proposal that highlights why your business is suited to the specific grant.
Incubators and accelerators
One way for first-time business owners to develop their management skills and deal with fewer funding stresses is to join a startup incubator or accelerator. These are organizations which support new businesses with office space, guidance, and seed funding. Often several companies will work together in a shared space, receiving advice or instruction from experienced entrepreneurs. As always, you’ll need to prepare a pitch or proposal for the incubator owners.
Keep your options open: Alternative and non-traditional funding
When funding a startup, it’s important to keep an open mind and accept that, if one type of funding doesn’t pan out, there are alternatives. If you’re having trouble finding investors, try a peer-to-peer lending platform that will connect you directly to either individual investors or crowdfunding schemes. While peer-to-peer platforms usually offer more lenient terms than other methods, they may involve higher risk.
If you’re invoicing clients or accepting credit cards, consider revenue-based financing. This is a form of lending in which you offer a share of your future profits as collateral for a secured loan. You may find this listed under merchant services.
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