Capital is essential for any new business that wants to hit the ground running. With enough startup funding, you can implement your business ideas and succeed.
However, most start-up companies find it challenging to fund their business ideas and actualize their dreams. In fact, most entrepreneurs settle for riskier startup funding that makes their startups go into a debt trap and eventually fail.
The good news is that your business can get funding from both repayable and non-refundable sources. Before settling for funding, it is best for any entrepreneur to know their advantages and disadvantages.
This guide delves deeper into different startup funding options that can help you grow your business and have a steady income flow.
Start-Up Business Loans
One of the most reliable funding options for startups is business loans. A startup business loan is ideal for entrepreneurs with good personal credit scores. A good business plan and expense sheet are also necessary to prove the business’s seriousness.
Different types of organizations offer business loans to willing business owners. One of the most reliable and common sources of business loans is a bank.
Various credit unions, or Saccos, also issue loans to startup businesses. Online lenders, small business administrations, or non-profit microlenders can also issue loans to your business.
However, before settling on any business loan option, compare their rates and terms and conditions. Also, be ready to meet conditions and undergo assessments by the creditor to prove your creditworthiness and financial history.
Remember, the business’s loans are available at a given interest rate and repayment period.
Advantages of Business Loans
Instant Capital
Business owners don’t have to wait longer to receive startup loans as they are processed faster. Approval takes only a few hours, allowing you to scale your business on the right path quickly and easily.
Protects Personal Wealth
Another advantage of startup loans is that they protect your wealth. You do not have to use personal wealth as security or funds to start the business. Not using your wealth to secure a loan is less risky and allows entrepreneurs to manage the venture peacefully.
Low-Interest Rates
Business loans for startups also attract low-interest rates with no hidden charges. Low-interest rates allow business owners to succeed without a substantial financial burden. The loans also have flexible payment periods, an important consideration for startup businesses.
Better Control of the Business
As the business owner, you will have better control over its operation. This is because all the major decisions remain under your control, as you do not share power with the creditors.
Disadvantages of Business Loans
Eligibility Requirements
Before receiving a startup business loan, you must prove your credit score, the nature of the business, and its existence. Additionally, the creditor might require a minimum business turnover. All these can be challenging for a startup business to achieve, which denies them a chance to qualify for a loan.
Requires Guarantor
Even though most loans do not require collateral, some require the business owner to look for a guarantor. The loan guarantor must also meet some requirements that vary from one lending institution to the next. Getting a reliable guarantor is always challenging for most startups, as people fear risking losing their money.
Affects Cash Flow
Startup loans typically come with interest that needs to be paid along with the principal every month. This can put a financial strain on most startups if they have to pay the entire amount within a specific period.
It’s important to keep in mind that a business can only thrive if there is good cash flow. However, the loan repayment limits the amount of money that can be invested back into the business, which can lead to bankruptcy if not managed carefully
Grants for Start-Up Businesses
Startup businesses can also benefit from grants, which provide a source of free funding that business owners can apply for and receive upon approval.
Grant funding is for businesses that follow set policies from the overseeing government agency or private organization. Most grant lenders fund businesses that add value to a particular industry or sector through their stated values.
Grants have the advantage of not being loans, and therefore, there are no strict repayment schedules or interests to worry about. However, it’s important to note that grant lenders expect your business to contribute to their mission.
When applying for a grant, it’s advisable to choose one that resonates with your industry and allows you to connect with established entrepreneurs in your field. It’s essential to carefully read all the grant requirements and align your business operations with the grant-lender’s mission.
To increase your chances of receiving a grant, it’s crucial to plan how you will spend the funds and demonstrate to the grant organization your innovation and expansion plans.
There are various government grants available for different industries, such as the US Economic Development Administration (EDA) for the construction industry and the National Institute of Health grant for health-related businesses. Technological entrepreneurs can apply for Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants. Non-governmental grant organizations include COMCAST RISE, Halstead Grants, and the StartOut Founders Program.
Advantages of Grants
No Repayment
Grants should be your number one option when looking for reliable startup funding for your startup. This is because it is complementary money that does not pressure you to repay.
Free cash for a business only requires the entrepreneur to be smart to grow and make good money out of it. The business owner must also adhere to the organization’s mission to avoid fallouts.
Better Visibility
Receiving a grant means your business is much more innovative and competitive than the rest. It shows that your work is top-notch, which attracts the attention of most investors and other startup funding organizations. This improves your credibility amongst customers and potential leads, which is necessary for the visibility that scales a business.
Available to Every Business
The best thing about grants is that they are available for any business. You must follow the readily available information and grant conditions and stick to the deadline applications. However, you must research the startup funding organization’s missions and write an outstanding proposal to win it.
Disadvantages of Grants
The cons of grants include:
Highly Competitive
Most upcoming businesses apply for the same grant to help them actualize their dreams. So, be ready to face the competition and be smarter with your application. Have an attractive proposal that can convince the organization to fund your project instead of the competitors.
Time-Consuming
Grant application requires thorough research and paperwork. You have to write a good proposal that matches the organization’s mission.
Apart from that, the verification process takes time, and it is not a guarantee to receive the grant. This is despite successfully undergoing all the processes as the best candidate wins.
Strict Conditions
Grants also have strict conditions, which can put off an upcoming business. For example, you might be forced to spend money on a certain project or return the money. Alternatively, the grant lenders might require you to have a business plan and stick by it.
Crowdfunding for Start-Up Businesses
Crowdfunding is also one of the funding options for startups. It involves bringing together friends to raise funds for your business.
Currently, most people prefer online crowdfunding through reputable sites. The crowdfunding sites enable business owners to receive donations from those who believe in their business course.
You can opt for donation-based crowdfunding, where donors send money for a new project or product. In return, you send them a thank you note, or name mentions in your videos.
Another type of crowdfunding is investment crowdfunding, where your business allows the donors to be shareholders. It is a better option if you need funds, but fundraising through other methods is not helpful.
Pros of Crowdfunding for a Startup
You should consider crowdfunding because of the following benefits:
Provides a Wider Market Reach
After individuals believe in your business course, it is easier to turn them into customers. It is best to consider the donors as prospective clients after crowdfunding. Sell them your products or services and scale your business.
Quick Way of Raising Capital
Getting capital for starting your business through crowdfunding will take a little time. Identify the right crowdfunding sites or donors, sell them good ideas, and see your dreams come true.
Wider Audience Reach
Crowdfunding campaigns attract the attention of several potential investors or donors. A huge crowd can help you get more startup funding faster than traditional funding options. The campaigns also create hype around your business, which can increase brand awareness and sales.
No Refunds/Repayments
Running a business without the pressure of repaying the capital every month is enjoyable. Crowdfunding through donors or investors allows business owners to execute their plans without outstanding debt.
Centralized Communication
The crowdfunding platforms provide a central communication portal for all donors or investors. So there is no need to use several communication channels for fundraising. The platform facilitates on-time updates, keeping everyone on the same page.
Cons of Crowdfunding
Expect to experience the following disadvantages if you opt for crowdfunding:
It needs A lot of Effort
It requires time to identify and approach the right donors for crowdfunding. You will also have to draft the campaigns to promote and market them, which can be time-consuming.
Does Not Guarantee Success
It is not a guarantee that your crowdfunding campaign will be successful. Your business might not reach the set capital amount or get any donors.
It Attracts Negativity
Expect to receive negative comments even if the business plan is unique and innovative. Not everyone can support your idea, and a good thing attracts negativity. It can be a negative comment about your campaign, personality, or business. Just be brave enough to overcome such.
Not Suitable for All Brands
Some brands dealing with luxury products might find it rough with a crowdfunding campaign, as individuals might view that as something other than a necessity. However, brands that provide practical value can excel through it.
Angel Investors for Start-Up Businesses
Angel investors are private investors and business owners who seek financial support from them. Most angel investors help startups grow after analyzing the benefits they can get in return. They act as quasi-business partners who have other successful businesses but are willing to invest more.
Angel investors help entrepreneurs find capital without relying on friends, banks, or family. However, they are not easy to find, which requires you to do things right.
Unlike other funding options for startups, angel investors may help mentor business owners. If you are venturing into a new field without experience, opt for an angel investor to do things differently from your competitors.
Pros of Angel Investors
The advantages of angel investors are:
Takes Full Risk
Angel investors cannot reduce the money your business receives after believing in its potential. They can invest a lot and be hopeful of reaping huge rewards from a good investment idea. This differs from other funding sources that look at the possibility of a venture failing to materialize, leading to losses.
Better Growth Chances
Since most angel investors act as mentors for startup partners, they are likely to succeed in their business. The angel investors are experts with years of experience in the industry, and they can show you the tricks to make ends meet. With an angel investor, you have a high chance of surviving the business longer and getting high profits.
No Cash Repayments
Angel investors give you cash in return for shares or partnerships in the business. So, the money is not a loan that can drive your business into unforeseen debts.
If the venture takes off well both of you will reap the benefits. On the other hand, if the business fails, they won’t expect you to pay the funds.
Cons of Angel Investors
The main disadvantages of angel investors include the following:
No Full Control
Angel investors expect to control certain aspects of the business despite being inactive partners. They expect you to show them how you use funds and any decision relating to the business. They also expect regular updates on how the business runs, which takes some power from you.
Venture Capitalists for Startup Funding
A startup business can also go to venture capital firms for funding. Venture capitalists fund entrepreneurs in exchange for equity.
However, to receive startup funding from these firms, your business must have big market potential and use outstanding technology. They also work with entrepreneurs ready for any challenge the business brings their way to succeed.
Even though most startup businesses fail, venture capitalists take risks and hope for the venture to become profitable. This happens after the entrepreneur sends the investors a good pitch elaborating on their business idea.
Venture capitalists best suit high-growth companies with longer investment periods. A business must look for an investor, share its business plan, and allow the investor to review the company before investing.
The Pros of Venture Capitalists
The pros include:
- No repayments
- Better networking opportunities
- Offers professional support
- Facilitates faster business growth
Cons of Venture Capitalists
- Venture capitalists have strict requirements/conditions. They can take months to conduct due diligence on your business, delaying the pickup time.
- The venture capitalists take part in your business shares. This leaves you with less power over the business since the venture capitalists expect more shares whenever they add funds.
- A rigorous application process can affect your business plan pitching.
Friends and Family
The best funding options for startups that should be prioritized are from friends and family. Friends and family can fundraise for your business or partner with you.
However, other friends or family members are always willing to offer support without expecting anything in return. It is also possible to borrow from friends or family members and pay as agreed.
Most family funding comes with fewer conditions than formal funding for businesses. In most cases, they attract lower interest rates than formal funding institutions and are lenient. It does not also require a complete, achievable business plan, as family and friends are people you can talk to easily.
However, it is advisable to avoid money and relationships, as they can spoil friendships. Also, know which friends and relatives to approach for funding. Be clear and communicate freely with friends to enable them to support your dreams.
Pros of Funding from Friends and Family
- It is good for scaling your business as friends or family can contribute small amounts distributing the risks of losses. You only need to approach trustworthy friends or family and fundraise or partner.
- Offers support. Your friends and family can advise you on the right steps to take with the business. They can also be your customers and mentors in the industry.
- Networking is also possible through friends who “know someone that know someone.” having an established network can help the business succeed while cementing your relationship.
- Shields you from debts. If your friends donate money for your business you do not have to repay, protecting you from financial burdens. You will not have bank loans to clear or set conditions to meet to receive fundings.
Cons of Funding from Friends and Family
- It can ruin relationships.
- Limited financial capability.
So, is your startup business in need of some financing to get on its feet? These funding options are worth considering. Make sure you carry out your due diligence and consider the pros and cons before applying for any funding.
Good Luck!