Many individuals and organizations have one-of-a-kind start-up business ideas, along with the drive and talent to make them profitable. But launching those startup ideas comes with a cost, and not everyone has enough funds to support it.
Another concern is that traditional lenders like banks often only support established companies with a solid track record, usually a couple of years of substantial revenues. To them, new businesses are risky borrowers. Startups have more volatility and less dependability.
The good news is that there are alternative financing options for every start-up and small and midsize enterprise (SME) nowadays. Check these 5 sources of financing and funding out there for new startup companies:
5 Startup Funding Options Besides Banks
1. Family And Friends (Love Money And Patient Capital)
The quickest way to get capital funds for your start-up is to borrow from your spouse, parents, children, relatives, or close friends. This option is often called “love money” since you borrow from a loved one. However, bankers call it “patient capital” because your loved ones, the lenders, are willing to make a financial investment in you, usually with no expectation of turning a quick profit.
Love money or patient capital can be provided in different ways, such as:
● debt – meaning you must pay the funds back;
● equity – where the lenders get some shares in your company; or
● hybrid – like a royalty in which lenders get paid back through a percentage of your sales).
Although it can be considered the easiest way to get a source of funding, your family and friends rarely have much capital for startups.
Even if they lend you some money, there is still the risk of losing it, which usually harms family relationships. Hence, if you consider a business relationship with family or friends, avoid taking it lightly, regardless of how close you are to them. You can get money back but you can’t always get people back.
2. Online Loans
Online loans are your best bet if you need instant funds. Their approval rate and disbursement of funds are usually quick, as fast as in minutes or hours.
These loans are more flexible than banks since they tend to offer a variety of ways to finance a unique and young business. However, be careful of any speedy cash scam and fake online lenders. They usually offer guaranteed approval without interviewing you and ask for payment upfront that should be paid via prepaid cards.
To ensure you are not dealing with fraudsters, run your research and check whether they are legitimate first before applying.
3. Venture Capital
Consider venture capital funding if your company is already beyond the start-up period and needs larger funds. It is a type of financing provided by professional investors called venture capitalists (VC) to start-ups or SMEs with long-term growth potential. Specifically, VCs invest in companies likely to go public, be valued at $100 million, or be sold for massive future business profits within five years.
VCs are typically well-off individuals, investment banks, and other financial firms. They can provide funding ranging from $1 million to $5 million, and in some cases, up to $25 million. Apart from capital funds to help bootstrap early-stage companies’ operations, they can offer technical, managerial, and networking advice to help companies secure talent and growth, set milestones, reach targets, and ensure greater success.
The problem with venture capital is that it is usually in the form of private equity. It allows VCs to demand a large share of company equity, usually 25%-50% of a company’s ownership. They may also pressure companies to exit investments instead of pursuing long-term growth. On a positive note, compared to traditional financing options, they’re the least stringent since they don’t require cash flow or assets from the companies.
4. Angel Investors
Angel investors are similar to venture capitalists. They both want business equity and take calculated risks when investing in early-stage companies to gain a healthy return on investment (ROI).
However, angel investors have lower return expectations than venture capital, usually between 20% and 25%. That is because of lower investment amounts than venture capital, averaging $330,000.
The edge of angel investors over venture capitalists is that they often take more risks. Venture capitalists avoid the risk of losing investments, so they usually invest in already established companies. In contrast, angel investors help businesses from the ground up, even if the companies haven’t proven themselves yet.
5. Funding From Personal Savings
Using your savings to jumpstart your start-up is the most flexible option since you don’t have to keep up with any requirements and conditions and use the funds as you see fit.
It is also a great way to keep your costs low because you don’t take out any loans or give up equity. However, most experts recommend it as a last resort. Not only do you have limited capital available that can limit your ability to scale up operations, but you’re also risking your current and future financial health and freedom.
Before committing to this strategy, be sure to take all of its drawbacks into consideration.
Final Thoughts On Finding Funding
Remember that the ideal source of capital funds isn’t the most inexpensive. It should be the one that meets your business goals and current financial needs without putting your finances at risk. If you are lost, do your research first, or better, seek professional guidance, which is much more cost-effective than any kind of business loss.