Which Funding Option Should You Choose?

Having a billion-dollar idea for a new company or a startup is great, but do you actually have a billion dollars to start it?

You will most likely need a website, a technical team, a space to work from, and lastly enough money to pay your utilities while you embark on this new venture. All these requirements need to be financed.

Whether it’s a pop up shop, a cool new app, or a clothing line, the majority of entrepreneurs depend on a small amount of funding to get off the ground initially. Most opportunists are likely to dip into their pockets to keep their startup alive and kicking, but what do you do if your wallet is empty? Fortunately, we live in an age where innovation is encouraged and there are a multitude of funding options and resources to help keep your startup afloat.

There are three main types of startup funding available, and each comes with its own benefits and drawbacks. No matter what your idea is, one of these options is likely to be a perfect fit for your new business’s cash needs.

1. Bootstrapping

Personally funding your startup doesn’t have to mean using your own money to pay for the initial startup costs and development of your business. There are other alternative ways to jumpstart your business engine.

Many entrepreneurs use bootstrapping, which means financing your company by scraping together funds in unconventional ways. Using existing resources or earned revenue instead of borrowing is a great approach, but being creative and resourceful can be profitable too. Here are some popular ways of bootstrapping your business.

Renting out your home:

Most people wouldn’t think that their home could be a potential goldmine and an alternate way to fund their startups. For Adam Falla, founder of a cleaning startup, that meant renting out his apartment. Falla began using Airbnb as a form of supplementary income and an extra source of capital for his business. He would rent out his place or spare room for a few nights a month at a time.

Crowdfunding:

Crowdfunding is a relatively new, interesting, and disruptive way to raise money for your startup. You propose your idea online to an audience of potentially millions of people and, if they like the idea, they can pledge to support it for a few dollars. In return, you offer those who have pledged some perk or reward for doing so. This is a great way to boost your growth in the first few months after your product is launched. Check out Kickstarter or Indiegogo to get started.

The pros and cons of bootstrapping:

The pros: Bootstrapping can be beneficial because it means you won’t have extensive loans and monthly payments that bog you down, especially if you run into snags along the way.

The cons: If you’re looking to scale your business quickly, it can be advantageous to bring in outside sources of funding. So, what happens when your funds run out, or you decide you need something more? That will ultimately depend on the type of business you’re building, but these are some things to take into consideration.

2. Borrowing money

Many entrepreneurs treat their startup as if it were their own child. They would do whatever it takes for that child—even if they had to beg, borrow, or steal, so to speak. While the latter may be extreme, borrowing funds is a great way to finance your business idea, and it comes with fewer restrictions or terms and conditions.

Borrowing from friends and family:

Asking those nearest and dearest to you for money can feel intimidating, but reaching out to them is often a great step before you’re able to receive external funding. Let’s be honest, asking never hurt anyone, so give it a shot.

Perhaps you have an aunt or family member who may not be in the position to finance your idea, but they may be impressed enough to toss a few extra dollars your way. At the end of the day, every cent counts!  Before you take the leap, prepare a business plan, so you can explain to them exactly your intentions. If your idea is attractive enough, this may entice them to put some of their money to work in exchange for a share in your success.

The pros and cons of borrowing: 

The pros: You’re not dealing with a strictly regulated financial body, so they’ll be more flexible with the type of arrangement you can make on repaying the loan.

The cons: Accepting this type of loan can put stress on your relationship with that person if you can’t repay the money as originally planned.

3. Loans, angel investment, and venture capital  

If borrowing from family or friends is not your cup of tea, there’s an option to apply for a bank loan to fund your startup, or seek out investors, in the form of angel investment or venture capital funding. Although small business loans and outside investors are a great way to get that necessary funding, it’s not as easy as it sounds.

Bank loans:

Banks are well aware of the risks involved when investing in a new business. They need to be convinced that it will be profitable enough so they can expect the loan to be paid back. If you can show that you’ve started gaining traction and making money (and that a loan would help you earn even more), you may be able to qualify for a traditional bank loan.

The pros and cons of bank loans:

The pros: While difficult, it’s not impossible to qualify for a bank loan and if you can, it’s a great way to fund your business without having to give away any equity.

The cons: Many banks, especially the larger national banks, will have a series of protocols to be followed in regard to small business loans, and this can be time consuming and lead to frustration.

Seeking investors:

If you already have a startup, you’ll eventually need more capital to really get going, and the chances are that you’ve been advised to seek outside investors. These outside investors will either be angel investors or venture capitalists.

Angel investors:

A favorable place to start is angel investors, usually established business professionals with high net worths looking to invest in the next up-and-coming company. Your “angel” will typically invest in the early stages of a business starting from $10,000 up to few million dollars.

Finding angel investors is relatively straightforward: ask other entrepreneurs in your network, try AngelList, or check out the Angel Capital Association, which counts over 330 angel investor groups nationwide.

Venture capitalists:

A venture capitalist is the Godfather of investors. They will be more likely to require a seamless business plan, but they will also typically give you larger amounts of money. Venture capitalists (VCs) will invest in several startups on behalf of their clients, in hope of making money to pay back their client’s investments.

In other words, you’re up against a lot of competition, and not every business is suited for venture capital investment. While cold-calling a VC may not be the easiest feat, it’s a start. In order to get a meeting with a VC, it’s generally about who you know in the industry, and introductions can be made from other entrepreneurs or investors.

The pros and cons of outside investors:

The pros: Investors can be a great way to get quick access to the cash required to grow your business and can also offer you advice and guidance based on years of experience.

The cons: This type of funding is the most costly. The more help you require from investors—and the sooner you require it—the higher the equity share they will take in return.

There are many ways to raise money for your startup, and the methods above can be combined depending on your situation. Do your research, and you’ll find the best way to fund your business—just ensure that you keep as much equity in your business as possible.