A lot of budding entrepreneurs have asked us how they can raise capital for their new businesses. The answer is it’s extremely hard. Even if you are a tech startup with a hot idea and amazing growth potential, it’s still really hard to raise funds from investors who don’t know you when you don’t have much to show for your company. After all, 8 out of 10 entrepreneurs who start businesses fail within the first 5 years. Investors/Lenders rarely fund companies at this stage — however, there are other options.
The following are 6 viable ways to fund young businesses. Keep in mind these options are still hard — they either require a lot of time investment or have very high cost. We recommend that you write up a solid business plan before you start fundraising. You might also want to consider the following options in tandem with 1) waiting for some time until you save up the capital or 2) starting small with minimal costs.
1) Savings and Home Equity
The easiest way to get capital for your business is your savings. There’s no documentation or application required. If you don’t have a lot of savings, you can borrow against your home equity (if you are a home owner), which typically costs about 4.5% with minimal documentation. Keep in mind your young business can be risky and you can lose your savings should the venture fail.
2) Friends and Family
If you have a good support network, you should consider borrowing from your friends and family. In fact, it’s the most popular funding option for startup businesses. If your business succeeds, your friends and family share your success. If it doesn’t work out, they will usually give you time to pay them back. It’s also typically a lot cheaper than using credit cards. Personally, if I need funding, I will try borrowing from friends and family before I go to any third party lenders/investors.
3) Credit Cards and Personal Loans
Credit card advances have the stigma of being extremely expensive. Unfortunately, in the business financing world, the cost of using credit cards is actually lower than lots of other options such as merchant cash advances or cash flow loans. Credit card APRs range from 10% – 30%, depending on your credit scores and purchase types. You can often get 0% introductory APR for the first 12 months.
If you have a strong relationship with a bank, you might be able to get a personal loan for your business. Especially if you can provide good collateral. We have seen quite a few business owners finance their commercial vehicles through a bank, although the financing is structured as a personal loan.
Crowdfunding platforms like Kickstarter/IndieGoGo/GoFundMe have become increasingly popular in the past couple of years. If you are good at marketing and can present your product/business in a way that resonates with people, this can be a very viable option. You do have to spend a lot of time and effort to develop a kick-ass campaign to make it successful. A side benefit is that you get to talk to your customers through the campaign and this will certainly help you understand your market.
Small Business Innovation Research is a government sponsored program, in which a certain percentage of the research budgets of the 11 federal agencies are reserved for contracts or grants to small businesses. Approximately $2.5 billion is awarded through this program each year. SBIR phase one offers startup businesses up to $150K of grant money. The acceptance rate is fairly high: averaging around 16.7%. If your business is involved in any type of R&D, check out the SBIR website and see if you might qualify.
6) Kiva Zip and Microloans
Kiva Zip is awesome. It offers 0% interest rate business loans for entrepreneurs. It’s Kickstarter-style funding: the fund is crowdfunded from philanthropic minded lenders on Kiva Zip. You can get a $5,000 – $10,000 first loan through the platform after you find a trustee to endorse you. The trustee will walk you through the process, understand your personal and business financial situation and decide if they want to approve you on the platform. Once you are approved, they also help you develop a campaign and crowd fund on their website.
In addition, there are microfinance institutions around the country that will help you get a loan and provide you with technical assistance. You can see more details here. Among them, the ACCION network> is one of the most prominent and allows online applications. The typical cost is 8.5 – 15% interest rate plus origination fee.
Fundraising for young businesses is a big challenge. I would like to close out with a great piece of advice I got from a successful entrepreneur “Estimate the time and cost to get your business off the ground. Multiply the cost by 2 and the time by 3. Use those estimates to make sure you don’t run out of money or time.”
This article was originally written on July 9, 2014 and updated on October 17, 2019.