6 Funding Options for Startups

Building a new business is a challenging and rewarding experience, and there have never been more opportunities to get started than today. Thanks to the internet, it’s easier than ever to get educated in business and spread the word about your newest ideas. 

However, every good business idea requires a good strategy, along with a healthy source of startup funds. Fortunately, entrepreneurs and new business owners have many financing options to raise capital when starting—or growing—a business. Today, we’re going to dive into six of the best ways to fund a new business.

Option 1: Bootstrap Your Idea With Your Own Money

If you’re a savvy saver, self-funding your business idea is as simple as it gets. Most people don’t have a large enough stockpile of savings to launch a large business endeavor from scratch, but for those that do, it’s easier to get started since they don’t need to raise capital before launch.

Bootstrapping is most suitable for testing out clever ideas or building small side hustles. If your business idea will only require an initial investment of a few hundred dollars, then the potential for success outweighs the risk of failure.  As long as you don’t end up making payments, you can look into using business credit cards to increase your up-front purchasing power and maybe even benefit from a rewards program.

Unfortunately, most people don’t have a large amount of liquid cash available to invest in a large, unproven business venture. Some new business owners tap into retirement accounts or personal loans to launch a larger project. Still, these are incredibly high-risk options that most people should avoid when launching a business.

How to Successfully Self-Fund Your Business

1. Set up a separate account to run your business through. This will help you keep cleaner records and avoid tax headaches in the future.
2. Commit to taking it slow. The early stages of business growth are all about experimentation. Don’t invest too much too soon in an unproven idea.
3. Once you’ve figured out your product and marketing strategy, update your business plan accordingly and launch. Carefully invest more of your personal funds based on milestones of business growth.
4. Over time, your business should make enough revenue to, at the very least, cover its costs. Taper down the amount of your personal funds that you invest as your business revenue grows.
5. After a while, you’ll start earning money from your business instead of just pouring money into it. That’s when you’re ready for the next stage of business growth! 

Pros

• There’s much less pressure to grow at a breakneck pace when you’re bootstrapping your business. As long as you’re able to enjoy a healthy work-life balance, you can take your time building your business and trying things out, since the only money tied up in the venture is yours.
• Self-funding is the fastest method of capital injection. There’s no need to get a credit check or pitch investors so that you can get started right away!

Cons

• Your personal reserve of disposable cash is likely considerably less than what you could acquire through fundraising or borrowing. A lower initial investment usually means less risk at the expense of slower growth.
• You take on the most personal financial risk with this method. If your business fails, you could lose all the money you invested. 

Option 2: Get Family and Friends to Invest

As a second method of raising money for your business, you can get your friends and family involved. You can take out interest-free loans from people close to you who believe in your idea, or you can offer them a stake in the business. 

Unfortunately, while friends and family can be a good resource, getting them financially involved in your new business can complicate the relationship. Even a close friendship can break due to the growing pains of a new business.

If you choose to borrow money from people you know, it’s essential to keep careful records of everything you do and be as transparent with them as possible about the reality of your situation. Lying about the health of your business is never a good idea, but it’s especially bad when your friends are involved. 

While many successful businesses launched with the help of friends and family, many have instead been the downfall of close relationships, so borrow from your friends with great caution—if at all.

Pros

• There’s typically no need for a formal pitch when borrowing money from friends and family. You can probably reach an agreement in casual clothes around your kitchen table—no slide decks or bespoke suits required to make a good impression.
• Building a business with your friends or family can create a tremendous financial opportunity for the people you care about if your idea is successful.

Cons

• Unfortunately, business can be unpredictable, as many small business owners learned at the onset of the pandemic. When borrowing from friends, you could lose the relationship if things go wrong.
• Even though borrowing from friends will net you more funds than bootstrapping, your resource pool will still be limited compared to other options.
• In exchange for supplying part of the initial investment, your friends and family may want partial ownership of your business. This could lead to conflict in the long run.

Option 3: Crowdfund

One popular fundraising method for many modern startups is crowdfunding. Platforms like Kickstarter and GoFundMe have made it easier than ever to raise advance funding directly from your future consumers through the powers of digital marketing and community building.

Crowdfunding is unique in comparison to most other types of fundraising. Crowdfunders don’t “invest” in your business in anticipation of a return on their principal –– they usually “invest” because they’re interested in what you’re doing, and they want to see you succeed. 

Their reward is typically in the form of early access, bonus items, or special editions of the final product. Rewards for small investments can be as simple as adding the crowd funders’ names to a thank-you page on your website.

Typically, crowd funders want to be able to use the end product that you’re hoping to build, whether it’s a physical item or new software, and they’re willing to give you advance funding for development because they trust that you’ll be successful. For this reason, crowdfunding is typically most successful for DTC business models with broad appeal.

Pros

• Crowdfunding is one of the lowest-risk options for raising resources since it typically raises small amounts of money (as little as $1) from each “investor.”
• People who support projects on crowdfunding platforms do not expect a financial return on their investment or an ownership stake in the company. This means you can keep total ownership of your business and use the revenue as you see fit.
• Crowdfunding platforms have larger user bases, which helps to build momentum and reduces friction on potential investors.

Cons

• A successful crowdfunding campaign takes a lot of time and effort. If you have a weak marketing strategy, you’ll struggle to win supporters.
• Most crowdfunding platforms charge fees for their services, which means you’ll give part of your fundraising revenue away to the platform.

Option 4: Obtain a Startup Business Loan

A small business loan could be a good option if you need business funding but don’t want to borrow money from friends or manage an extensive advance marketing campaign. You may be able to access startup loans or other options from the Small Business Administration (SBA), such as an SBA microloan, SBA 7(a) loans, and other assistance from the SBA.

To secure a business loan, you’ll need a detailed business plan, a full expense report, a good credit score, and detailed financial projections for five years or more. Without these, you’re unlikely to qualify for a loan. Additionally, if you already have student loans or pre-existing debt, you may be even more unlikely to gain approval for a new loan.

Acquiring a business loan will be much easier with existing cash flow. However, it’s possible to get a loan before launching your product if you make a strong case, have an excellent credit history, and offer some kind of collateral. 

As with any venture that involves borrowing from a credit union bank, or other financial institution, proceed with caution. Defaulting on business lines of credit can have catastrophic long-term effects on your financial health. However, working capital is necessary to get started in any venture, so it may be worth it if everything aligns for you.

Pros

• A business loan can provide access to lots of capital for growth—often considerably more than you may be able to access by bootstrapping or borrowing from friends.
• A business loan doesn’t require an extensive marketing campaign the way crowdfunding does. It does, however, demand exceptional record-keeping and a stellar business plan.
• When funding your idea with a business loan, you can keep ownership of the company, plus the revenue above and beyond the loan terms.

Cons

• Business loans are a high-risk strategy. Business failure can hurt your ability to borrow money or start another business in the future.
• Strict payment windows give you less opportunity to experiment and take risks.
• Securing a business loan is often a prolonged process that requires a lot of paperwork, all without guaranteeing that you’ll get approved.

Option 5: Find Angel Investors and Venture Capitalists

One of the most advanced and highest-risk ways to raise business funds is negotiating with venture capitalists. Fundraising via venture capital is most suitable for companies with a fast growth trajectory and big plans to innovate industries or upset sectors. Venture capitalists typically aren’t interested in small businesses operated from a person’s home without many employees.

Venture capitalists usually invest in businesses with high potential for fast, explosive growth. They are willing to risk large amounts of funds on projects they believe in, but they typically will only do so in exchange for a share of ownership and a leading role in the business. It’s especially hard to attract venture capitalists if you’ve had less than a year in business.

Venture capital is a high-risk, high-reward option most suitable for an experienced business owner with a bulletproof business plan and a strong team of employees.

Pros

• Venture capital is one of the fastest ways to raise a large amount of money for a business since venture capitalists usually have much liquid cash at all times to invest in golden opportunities.
• Venture capitalists are often well-connected and highly respected people. If a prominent investor gets involved in your project, word will spread quickly and generate interest in your business.

Cons

• You need a minimum viable product, a detailed business plan, and a strong growth trajectory to secure venture capital.
• Most venture capitalists will demand an ownership stake in the company and a seat on the board of directors.
• With a venture capitalist involved in business decisions, you may eventually lose influence over your project –– you could even be ejected from your own company!

Option 6: Explore Flexible Cash Flow Aids For Ecommerce Businesses

One of the best modern funding solutions for growing eCommerce businesses is cash flow acceleration from Payability. Most fund-raising methods are slow and can hold back the growth of your project, but Payability is fast, flexible, and built specifically to help you build a better eCommerce business.

Payability offers two funding solutions for eCommerce sellers. Instant Access provides daily marketplace Payouts for marketplace sellers, which means you no longer have to wait for your funds to clear from your eCommerce sales—get paid as soon as you sell! Instant Advance provides immediate access to up to $250k in growth funds for marketing, research, hiring, or other business needs.

Pros

• Payability offers you the fastest access to eCommerce funding. Payability doesn’t require any lengthy paperwork or credit checks. Apply online with your seller account and get funded in as little as one business day!
• Payability lets you access your money on your schedule via Instant Transfer, Same Day ACH, or wire.
• With flexible funding from Payability, you keep total ownership of your company and can use your profits however you see fit.
• Payability helps you earn more money with up to 2% cash back on every purchase you make with the Payability Seller Card.

Cons

• Payability is built for eCommerce businesses, which isn’t for everyone—yet!
• Payability requires a history of marketplace sales and good account health, so it isn’t suitable for new eCommerce businesses.

Payability is the best cash flow aid for eCommerce businesses ready to scale. If you’re eager to put your growth plans in action, explore Payability’s flexible eCommerce funding solutions today!