5 funding options for start-ups
Starting your own business requires enough capital to ensure you can pay your bills until your company turns a profit. Depending on the type and size of your business, you may need thousands of dollars monthly to cover overhead.
If you’re wondering where to find business start-up funding, there are a variety of options available to you. Each of these options has its advantages and disadvantages, and it’s important to pick the funding that meets your needs and works for your business.
Here are 5 funding options for start-up companies.
1. Personal investment
Also known as bootstrapping, personal investment means you put your own assets into your company. Banks and other funders want to see that you’ve invested financially in your business—this suggests to them that you’re committed to the venture.
If you can fund your business personally without risking your financial future, it might be worthwhile. Funding your business means you don’t have to give up control or allow others a say in how you run things. Doing so, however, means your finances are on the line if things don’t go as well as expected.
2. Friends and family
If your friends and family have capital to invest, you can turn to them for funding. They loan you their capital that you repay when your business makes a profit. The interest rates are usually much better than you would get at a financial institution and the repayment terms are more flexible.
The issues arise with borrowing money from loved ones. Friends and family rarely have capital to invest and they may want equity in your business. If you face financial problems down the road, they’ll be affected, which can strain your relationship.
Your business might be the right model to take on either venture capitalists or angel investors. Both inject much needed start-up capital into a business, but each requires some form of control.
Venture capitalists invest in companies with high-growth potential, and they expect a healthy return on their investment. You’ll give up some ownership or equity in your company in exchange for their financial backing. If you go with venture capital, make sure the investors you bring in have relevant experience in your industry.
Angel investors often invest in small start-ups and help people by contributing financially and with their expertise. They may not expect high returns for their investment but they may want a managerial role in your company.
4. Business incubators
Also known as accelerators, business incubators provide financial support and logistical resources to new companies—for example, they might offer a laboratory so your new business can develop its products before starting production. Once the business enters a production phase, it leaves the incubator.
5. Grants, loans and subsidies
Government agencies and financial institutions offer grants, loans and subsidies for start-ups. The competition for grants and subsidies is high, and the amount you receive varies. Many grants require you to invest your own money or prove you have funding from other sources.
Bank loans require you to prove you have a solid business idea and are capable of repaying the loan. If you’re a new entrepreneur, you may have to provide a personal guarantee that the money will be repaid.
There are numerous funding options for your start-up, each of which has advantages and disadvantages. Knowing how much money you need to cover your initial costs, how long it will take to turn a profit and how much control you’re willing to give up in exchange for funding will help you choose the option that’s best for you.