You have a killer idea, but it’s going to take some money to get it off the ground. Entrepreneurs often have a lot of questions about how to get funding for a business or for funding for small businesses. Depending on the type of business, the amount needed, and the cost of obtaining the funding, there are ways to effectively execute small business funding. While in some cases it can be a daunting process, below are some of the most common ways to get your business funded along with their pros and cons.
The pros and cons are based on the following specific set of goals that may or may not apply to your specific business, but are important to many business owners:
a) keeping control of the business;
b) keeping costs of capital low;
c) minimizing time spent dealing with financing aspects of the business (i.e., accommodating lenders and/or investors); and
How to Get Funding for a Business
1. Equity Raise
An equity raise is a traditional way of financing a business. It requires compliance with federal securities laws and a number of other formalities. It also allows numerous shareholders to have a stake in the company and allow them to vote on corporate matters.
Pros: Size of fundraising can be large.
Cons: Expensive, complicated process, and allows others to have a say in your company.
2. Venture Capital
This is a common type of small business funding where a company will seek funds from a venture capital firm in exchange for the firm’s stake in the company. The firm will probably take a keen interest in the business and have some savvy in helping run the business, with expectations of results and rewards.
Pros: Sophisticated backers and resources of a larger company.
Cons: Losing some control of the company and having other opinions about how the company is operated.
Another common type of funding a small business is by taking on co-venturers; meaning, taking on “partners” that will be involved in the day-to-day business. This will not only spread the workload, but could also provide additional sources of small business financing.
Pros: Collective work, additional financing.
Cons: Less operational freedom, less stake in the company.
4. Angel investor
An angel investor is someone who can provide fast business funding either at the beginning stage of the business or for a small business or during a time of a business’s expansion. These investors generally know the company owner and are investing for personal rather than business reasons. The pure angel investor does not really look to get involved in day-to-day operations, but may take a stake in the company.
Pros: Fast, low interest and operating freedom.
Cons: Need to have access to an individual or individuals for financing a business.
5. Friends and Family
Traditionally, many individuals have received small business funding from raising money from friends and family. This type of small business funding is not exempt from federal and state securities laws, but can take the form of loans and other types of contributions.
Pros: Usually a lower interest rate.
Cons: Dealing with loans from friends and family can create personal issues.
6. Equity Crowdfunding
Equity crowdfunding is a fairly new concept under securities laws, and is currently in the review phase of the Securities and Exchange Commission. The point of equity crowdfunding is to allow companies to fund a business through offering shares to the general public without the significant hurdles that federal and state securities laws currently present.
Pros: Wider range of investors, more access to capital.
Cons: Currently hypothetical, may lead to a diverse base of shareholders that will have opinions on how the business is run.
7. Personal money
Probably one of the most conventional ways for fast business funding is through your personal savings. Depending on the type of business, you may not need very much money to startup; or if you have significant personal wealth, you may invest some or all of it to fund a business. Many small businesses can fund themselves through a disciplined approach.
Pros: No investors, no interest payments.
Cons: Taking a risk with personal money; opportunity cost of using the money in other investments or personally.
8. Small Business Loans
Probably one of the more conventional ways to fund a business is through small business loans. These are exactly as you would expect. The Small Business Administration as well as local and national banks may provide loans to small businesses that qualify.
Pros: No need to share the company.
Cons: Loans are most likely interest-bearing and usually need a personal guarantee (so you may be on the hook) to be approved.
9. Government Grants
Depending on what your business does, your business profile, or your personal profile, (veteran, minority etc.), you may be able to get startup grants from federal or state governments or, possibly, local governments. While this type of small business funding is pretty rare, it’s possible that you can qualify for some government funding.Business.usa.gov has an “Access Financing” search tool that you can use to see if you could possibly qualify for governmental grants.
Pros: Grants usually do not have to be paid back.
Cons: It’s really tough to qualify as the grants are not available to everyone.
10. Non-Equity Crowdfunding
This type of funding would be known as alternative business funding, simply because it only exists because of the advent of the Internet. This is the type of small business funding that is performed online, giving no equity stake to those that are funding your small business. Small businesses that fund through this method often trade products or other types of gifts in exchange for different levels of business funding.
Pros: Cheap, easy way to for business funding.
Cons: May take awhile to get the small business funding you need. Most Internet sites require a percentage of the capital raise for administrative fees.
So How Do I Fund My Business?
There is no miracle way to fund a business, but the ten ways above give you a host of options. Good news is, you can utilize a little bit of each if you need to. See which of these best fit your goals and apply as needed.
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