One of the most frequent questions anonymous entrepreneurs ask is “How can I find the money to start a business?”. Some of them are waiting for a magic decision to get their business funded easily and without much effort.
Sorry to burst your bubble but there isn’t any magic, and nobody is waiting to throw money at you just because you have an exciting business idea.
When it comes to startup financing, there is no approach that fits every business. Aside from the fact that every business has its unique needs, each funding option differs in terms and eligibility criteria.
In this article, we’ll share realistic ways to fund your business.
Determine how much funding you’ll need
First things first—before considering any funding options, you need to estimate your startup costs to determine how much funding you really need. This can not only give you a jumpstart but also narrow down potential options.
Additionally, having a detailed financial plan can increase the odds of being approved for funding as it showcases forethought on your part.
Once you’ve figured out how much you’ll need, it’s time to browse your options.
One of the most obvious funding options is a traditional business loan. While the process and requirements may be completely different no matter the lender, there are still different options you can consider.
Small Business Administration loans are the most popular loans among small business owners in the United States. SBA offers two options for entrepreneurs: a microloan program and Community Advantage Loans. In fact, the SBA doesn’t make loans, they guarantee them. Here are qualification requirements:
Microloans: The SBA’s microloan program offers loans up to $50,000 but the average loan is $13,000. To find out if your business qualifies, you need to find a microlender in your area and determine what you need to qualify.
Community Advantage Loans: The exact requirements for an SBA Community Advantage Loan, a federally guaranteed term loan, depend on the lender you choose to work with. Generally, you’ll need to show that your business idea is viable and you’re a responsible borrower.
Bank loans may be a simple solution for business owners looking for funding. Some banks offer special loans to small businesses, but most banks are extremely careful about giving money to unknown startups. That’s why sometimes it can be difficult to qualify.
If you have a fantastic business idea and you’re good at social media, crowdfunding might be an option. These days there are a number of businesses that succeeded pulling together funding through crowdfunding platforms.
The downside? You won’t be the only one who aims to receive crowdfunding, so to make your idea stand out you have to generate a lot of buzz.
Once you build a loyal fan base, choose the crowdfunding platform that fits best with your business idea. Here’s the difference between the major platforms:
- Kickstarter is a reward-based platform whose mission is to bring creative projects to life. It’s an all-or-nothing platform in which you have to hit your funding goal to collect the money your backers have pledged. If the project reaches its funding goal, backers’ credit cards are charged and if the project fails, no one is charged.
- GoFundMe is a donation-based platform that’s used for both personal and business funding needs. With GoFundMe, you can set a funding goal and people donate money to help you reach it.
- Kiva is a crowd-sourced loan program. With Kiva, you apply for a loan and go through the underwriting and approval process. If the idea is approved, Kiva will post the project to the platform for individual lenders to support. Then lenders crowdfund the loan in increments of $25 or more.
An angel investor is someone who invests because they believe in the entrepreneur and the project — of course, they’re also interested in making money off their investments.
The angel investors need to meet the Securities Exchange Commission’s (SEC) definition of accredited investors. They need to have a net worth of at least $1 million and make $200,000 a year.
When raising money from angels, you should know that they will own a piece of your business and you then have a responsibility to act in the best interests of the business and its shareholders. This is one of the tradeoffs of getting your startup funded.
Accelerators and incubators
Often used interchangeably, accelerators and incubators actually serve different purposes and accept different kinds of startups.
If you’re a proven startup that needs money to fuel growth, an accelerator may be the best option. If your company is at an early stage, you are better off with the guidance of an incubator. Generally, founders with unverified ideas are a better fit for incubators than accelerators, because the goal of such organizations is to help founders formulate a business model and find product-market fit.
A startup accelerator is an organization that offers mentorship, connections, and, of course capital business founders. It’s designed to partner with startups having promising MVPs. The most popular accelerators include MassChallenge, Techstars and Y Combinator.
The fact you should keep in mind is that the acceptance rate for accelerators is usually low since thousands of startups apply for the programs.
However, accelerators have tangible benefits for talented startups, investors, and business decision-makers:
- One-of-a-kind networking opportunities
- Guidance from serial founders and investors
- Collaboration and partnership options with other startups
- Having a chance to learn at a rapid pace
Incubators aren’t usually designed to rapidly boost growth. Instead, these organizations nurture startups over longer periods of time.
While accelerators pay close attention to each startup, incubators provide ad-hoc help with legal and business services and help turn an unverified concept into a market-ready product. There’s no special program here—just collaboration and support when needed.
Author’s bio: Anna Grechko is a marketing enthusiast and knows the field inside out. She is the marketing specialist at Smart IT. Sharing knowledge is a big part of her career, so Anna actively seeks to spread good vibes, and collaborates with the great tech and marketing minds of the world.