The startup stage of a business is one of the most difficult times to seek outside funding — you are forced to find an influx of cash before you’ve had the time to demonstrate that your idea is worth a lender’s money. Even the hottest tech startups had to jump through many hoops to raise the money they needed to build and grow their business.
As a hopeful entrepreneur, you may not be aware of exactly how you can get the money you need, and these concerns can persist even as you become a more savvy business owner. If you need to purchase new equipment, move to a bigger space, make a seasonal hire, etc., where can you get the money for the transaction? Here are a few ways to get the capital you need:
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Banks and U.S. Small Business Administration
Building a relationship with a bank is one of the smartest moves you can make for the future of your business. Private banks can provide financing for your startup in the form of a line of credit, but it may be challenging to obtain a loan. In addition to your business credit score, these financial institutions will examine how long you’ve been in business. To mitigate their risk, most banks will only lend to you if you’ve been in operation for at least two years.
You can improve your chances of getting a loan with a reasonable interest rate if it is a Small Business Administration (SBA) 7(a) loan or microloan, as the SBA guarantees the loan in the event of default. Check out the SBA’s microloan program and preferred 7(a) lender list to see if there is an intermediary lender near you.
To receive funding from angel investors, you’ll need to be able to explain your business in a way that resonates with the investor. An enticing business pitch will be a necessary part of the equation, and it’s best to seek out investors that know something about the industry or problem you are trying to tackle. If the investor is allured by your idea, he or she may offer you a small amount of money in exchange for a stake in your company.
Angel investors typically only make contributions when your business is first getting off the ground, but the best investors will also make a lasting impact on your business by offering advice and other resources to help your company grow.
These investors make a larger contribution in exchange for some control of your business. Working with venture capitalists is more of a formal investing relationship, and the goal is not just getting your business off the ground but also ensuring its future growth.
Venture capitalists are usually interested in businesses that will produce 10x or more return on their investment in just a few years. If you are expecting slow, consistent growth from your business, then venture capital funding is probably not for you.
Friends and family
Friends and family financing is a popular financing option for startup businesses because a personal relationship can ensure that you’re getting the money at a lower cost. Your personal support network typically won’t need to review your business credit report to lend you some cash, and they will be more willing than financial institutions to offer flexible repayment terms.
This is a relatively new way of accumulating funding. A business can now use sites like Kiva Zip and Indiegogo to solicit small investments from a large number of individuals through a “campaign” where they showcase what their business has to offer. Campaign backers will donate money in exchange for the promise of a gift. The gift can be anything from a thank you note to a pre-order of the business’s future product.
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