According to a recent study been carried out, over 94% of start-up companies fail during their first year of operation. Lack of funds happens to be one of the common reasons.
Money is the bloodline of any commercial enterprise.
The lengthy painstaking yet thrilling journey from the business idea or concept to revenue-generating business needs a fuel named capital.
That’s why, at almost every stage of the business, entrepreneurs always try to avoid financial mistakes and eventually find themselves asking this question which is – How do I finance my startup?
When you would need funding in your business largely depends on the nature and type of the business that you need the funding for.
However, as soon as you have realized the need for fundraising, you can use some of these various ways below to get funding for your business.
This is a broad guide that lists 13 funding alternatives that will help you raise capital in your business.
How To Raise Funds For Business Startup
1) Bootstrapping your startup business
Self-funding, additionally referred to as bootstrapping, is an effective way of startup financing, mainly when you are just beginning your business.
An entrepreneur who is just starting for the first time often has difficulty getting investment without first showing some traction and a plan for success.
You can invest from your personal financial savings or can get your circle of friends and family to make contributions.
This can be easy to raise capital because of much fewer formalities/compliances, including fewer costs of raising capital to fund your business.
In most conditions, family and friends are flexible with the interest rate.
Self-funding or bootstrapping should be considered as a first funding alternative because of its advantages.
When you have your very own capital, you are tied to the business. At a later stage, investors consider this as an awesome factor.
But that is suitable only if the initial capital required to start the business is small.
Some businesses need money from the first day and for such type of business, bootstrapping may not be a very good funding alternative.
Bootstrapping is likewise about stretching assets – both financial assets and otherwise – as far as they can stretch.
2) Equity Financing
Equity financing is a way to fund a business startup in which a business owner sells shares of a company in return for upfront capital. These funds are used for immediate business operations or long-term growth. The cost of shares is based on the company’s valuation, or worth, and investors become part owners of the business. Investors who purchase the shares are also purchasing ownership rights to the company.
Equity financing can refer to the sale of all equity instruments, such as common stock, preferred shares, share warrants, etc. Equity financing is especially important during a company’s startup stage to finance plant assets and initial operating expenses. Investors make gains by receiving dividends or when their shares increase in price.
Equity financing can come from a number of sources, such as private equity investors, an IPO (Initial Public Offering), or even your family. If you are raising capital for rapid growth or are in an industry with expensive research and development, you will likely go through several rounds of equity financing during your growth.
3) Crowdfunding as a funding alternative
Crowdfunding is one of the more recent ways of investing in startups to get funding for business operations and it has been gaining a lot of vogues recently.
It’s like taking a loan, pre-order, contribution, or investment from a couple of people at the same time.
This is how crowdfunding works – An entrepreneur will set up a detailed description of his business on a crowdfunding platform.
He will mention the goals of his business, plans of how the business will make a profit, how much funding he needs and for what reasons, and many others. and then customers can examine the business and supply the entrepreneur with the capital
Why you should try to consider Crowdfunding as an investment option in your business:
The good thing about crowdfunding is that it can also generate interest and subsequently help in marketing the product alongside financing.
It is also a boon in case you are not sure if there can be any demand for the product you’re working on.
This process can eliminate or reduce professional investors and brokers by putting funds inside the hands of common people.
It additionally might attract venture-capital investment down the line if a company has a thriving campaign.
Also, understand that crowdfunding is a competitive place to earn funding, so until your business is certainly rock solid and can gain the awareness of the average consumer through proper, it might be hard to find crowdfunding work for you
Some of the popular crowdfunding sites in Canada, kickstarter, GoFundMe, crowdfunder, FrontFundr, FundRazr.
In Europe, Crowdcube, Funding Circle, OurCrowd, Ulule, FundedByMe, MyMicroinvest.
In the US, Kickstarter, RocketHub, Dreamfunded, Onevest, and GoFundMe are famous crowdfunding platforms.
4) Get Angel investment in your Startup
Angel investors are individuals with surplus coins and a keen interest to invest their money in upcoming startups.
They also walk in groups of networks to collectively screen the proposals before investing. They also can provide mentoring or advice alongside capital.
Angel investors have helped to start up many outstanding companies, some of them are Google, Yahoo, and Alibaba.
This other form of investment commonly occurs in a business’s early growth stage, with investors anticipating a rise in equity. They prefer to assume more risks in investment for higher returns.
Angel investing as a funding alternative has its shortcomings too. Angel investors invest lesser amounts than venture capitalists.
Here’s a listing of popular Angel investors in the United States – Angelinvestmentnetwork, SeedInvest, Tracxn.
5) Get Venture Capital For Your Business
Venture capitals are funds that are managed professionally to invest in companies that have huge potential.
They often invest in a business against equity and exit when there is an IPO or an acquisition.
VCs also known as venture capital provide skill and expertise, mentorship and act as a litmus test of where the organization is going, evaluating the business from the profitability and scalability point of view.
A venture capital investment may be the best option for small businesses that have grown beyond the startup phase and already generating revenues.
Fast-growth companies like Uber, Flipkart, etc with an exit strategy already in place can gain up to tens of millions of dollars that can be used to invest, network, grow and expand their company quickly.
However, there are a few downsides to Venture Capitalists as an option to get funding.
VCs have a short leash when it comes to company loyalty and usually look to recover their investment within a three- to five-year time window.
If you have a product that is taking longer than a three- to five-year time window to get to market, then venture-capital investors may not be very interested in you.
They particularly look for larger opportunities that are a little bit more stable, companies that have a strong team of people and good traction.
You also have to be flexible with your business and sometimes give up a little bit more power, this might not be your best option, especially if you’re not interested in too much mentorship or compromise.
6) Get Funding From Business Incubators And Accelerators
Businesses in the early stage can consider Incubator and Accelerator programs as an option to get funding.
Business Incubators and accelerators can be found in almost every major city, these programs assist hundreds of startup businesses every year.
Though incubators and accelerators are used interchangeably, there are few fundamental differences between the two terms.
Incubators are like a parent to a child, who nurture the business providing the necessary tools and training and network to a business.
Accelerators so more or less the same thing, but an incubator nurtures a business to walk, while an accelerator helps to take a giant leap from the business phase to another.
These programs usually take up to 4-8 months and it may e time-consuming for the business owners.
But it is a place where you will be able to make good connections with mentors, investors, and other fellow startups using this platform.
In the US, companies like Dropbox and Airbnb started with an accelerator – Y Combinator. Here is a list of the top 10 incubators & accelerators in the United States and Canada.
- Le Camp (Canada)
- DMZ (Canada)
- Extreme Accelerator (Canada)
- Creative Destructive Lab (Canada)
- Lunch academy (Canada)
- Techstars (United States)
- Capital Factory (United States)
- MassChallenge (United States)
- MergeLane (United States)
- New Venture Challenge (United States)
7) Raise Funds By Winning Contests
There has been an increase in the number of contests that can tremendously help you to maximize the fundraising opportunities.
It motivates entrepreneurs with business ideas to set up their businesses.
In a competition like this, you either have to build a product or prepare a business plan.
Winning these contests can also get you some media coverage.
To improve your success in these contests, you need to make your project stand out.
You can one way or the other showcase your idea in person or pitch it through a business plan.
It should be comprehensive enough to convince anyone that your idea is worth investing in.
startups, Microsoft BizSparks, Conquest, NextBigIdea Contest, and Lets Ignite. Check out the latest startup programs & contests in your area. Here is a calendar of various Business Plan competitions.
8) Raise Money Through Bank Loans:
Normally, banks are the first avenue that entrepreneurs go when thinking about funding.
The bank gives two kinds of financing for businesses. The first one is a working capital loan, and the other is funding.
A Working Capital loan is a kind of bank loan required to run one complete cycle of revenue-generating operations, and the limit is usually determined by hypothecating stocks and debtors.
Funding from the bank would consist of the normal process of sharing the business plan and the details about the valuation, along with the report of the project, based on which the loan is sanctioned.
In the United States, sites like Kabbage can help you get a working capital loan online in minutes. Unlike traditional lenders, Kabbage approves small business loans by looking at real-life data, not just a credit score.
9) Get Business Loans From Microfinance Providers or NBFCs
If you are not qualified for a bank loan, what would you do? There is still an option.
Microfinance happens to be an alternative access to financial services for those who do not have access to conventional banking services.
Microfinance is increasingly becoming popular for those who have limited requirements and low credit ratings to get loans from a bank.
Similarly, NBFCs are Non-Banking Financial Corporations that provide Banking services without meeting the legal requirements of a bank.
10) Government Programs That Offer Financial Capital
Explore loans and funding programs backed by the government for your business.
It may be in the form of a grant, a loan. Different countries have different programs that help entrepreneurs to get financial capital for their business.
Here are some of the government programs that offer financial capital for the United State:
- Federal stimulus aid
- Government grant
- Government contract assistance
- Natural resource sales assistance program
- General small business Grant
- Industry specific and diversity small business grant and many more
You can search for any government grant that is available in your state or country.
11) Product Pre-sale
Selling your products before they launch is an often-overlooked and highly effective way to raise the required fund for financing your business.
Remember how Apple & Samsung start pre-orders of their products well ahead of the official launch?
It’s a great way to be cash flow positive and a way to prepare yourself for consumer demand.
12) Selling Assets
This might seem hard to implement but it can help you meet your short-term fund requirements.
Assets can be defined as anything an individual or company owns. This can include physical things like:
- Real estate (land or buildings)
- Equipment
- Money
- Vehicles
- Inventory (products)
- Investments
Things of lesser tangibility like a customer or client base, intellectual property, and such are also classified assets to a business.
13) Credit Cards
Business credit cards are part of the most readily available ways to finance a startup and can be a fast way to get money instantly.
If you are just a new business and don’t have a lot of expenses, you can use a credit card and keep paying the minimum payment.
But keep in mind that the interest rates and costs on the cards can pile up very quickly, and carrying that debt can be detrimental to a business owner’s credit.
Conclusion & Next Steps
If you want to grow fast, you probably need an external source of capital.
If you bootstrap and remain without outside funding for too long, you may be unable to take advantage of market opportunities.
Now the big question is – How do you prepare your business for fundraising? It’s better to begin from from the start with good corporate governance as it might get hard to back out and also try to exert fiscal discipline