How to get funding for small business?

The excuse that you can’t start a business because you don’t have money is not valid anymore. Just like you may be wondering on how to get ...

The excuse that you can’t start a business because you don’t have money is not valid anymore. Just like you may be wondering on how to get startup business funding, a tremendous number of startups need funding at different stages. Their financial needs, development goals, and overall business risks are very different. On the other side, there is a huge amount of money waiting for good investment opportunities awaiting funding for small business. You just need to know what funding sources are available and which of them would be most suitable in your case.

getting funding for a business

During my global research on startups, I found one very common mistake that early stage startups tend to do when going for fundraising for the first time. Most of them try to spread the news about themselves as wide as possible and approach all possible funding sources. Such fundraising efforts mostly end up as a terrible waste of time if you don’t do your homework first. You already know about the fundraising process and should have foreseen your startup development milestones. Now it’s about time to get acquainted with different startup funding sources and decide which of them you will use to achieve the particular milestones of your startup development.

Even if you are bootstrapping and currently don’t see the need for outside investment, this post might be useful for you when you decide to scale your business.

funding for small business

Funding for small business: Personal savings or loan

Most investors and your future partners will take you more seriously if you invest at least some amount of your personal assets. Said another way, if you don’t invest money in your project, why should anybody else do that? Sure, that’s no big deal if you believe in your business idea and have some savings, but what should you do if you don’t have any assets? Here are few possibilities on how to get initial funding on your own:
  • Selling your assets that you don’t really need anymore. Selling them might help you at least partly cover your initial costs (for example, to create low fidelity prototypes and test some initial hypotheses).
  • Family and friends usually believe in you much more than any bank. Maybe they will support your idea financially without waiting until you have real customers and revenue. Borrowing from friends and family is an interesting alternative as you can come to an agreement faster than with any bank and maybe have low or even no-interest credit. It is recommended that these commitments be done in writing with some kind of condition (for example, maybe you will be obligated to return the loan from your salary or any other sources after you get funded by the investor, or you will convert the loan into equity at a particular development stage and etc.).
  • The personal loan might be a solution if you have an excellent credit history. If your startup isn’t a company yet, you can try talk to the bank and get a personal credit. You’ll have to be able to present how the loan will be spent and what income sources you have to cover your financial obligation. If your startup has no income and your personal income is too low, you might seem too risky tote bank and you won’t get the loan.
  • Peer-to-peer lending platforms might be considered as a small business loan alternative if they are available for you. A peer-to-peer lending platform is a financial marketplace which connects people willing to lend their money to people—and sometimes companies—who want to get a loan. This is not a crowdfunding platform. You’ll have to pay back the loan with interest that might be higher than in a bank. The difference is that you won’t owe a single amount to a bank, but many small amounts to a lot of people.
  • Credit cards usually have a high interest rate, therefore it’s not very wise to overuse them. But, if you need cash to make progress in your startup and become more interesting to potential investors, this option should be considered as well. Actually, there are specific credit cards designed for entrepreneurs. Call to your bank to talk about possible options.

Funding for small business: Business income in advance

Selling your products before they are launched is an often overlooked yet highly effective way to raise the money needed for financing your business. Personally, I like this most because it has a double benefit! If you can successfully run at least some pre-orders of your product, this not only allows you to collect some money but also validates the market hypotheses. Stay focused on real sales during your experiments, and run the pre-order campaign once the prototype is introduced.

Even a non-standard startup such as Eematico has been successful for more than two years by focusing on business income in advance. Eematico is an organization in Romania that leads innovation of educational programs (not software) aimed at developing life skills in children for the 21st century. In their first two years, the team has managed to create more than 600 hours of educational activities as well as full sets of specific materials for more than 190 different activities. Programs and activities are being sold to thousands of children. The key success factor was selling their services and products early on, as soon as they were viable. This allowed them to develop educational programs with 9 modules of 4 weekly lessons each, while only investing the money for just the first module. Once Eematico designed the concept, they made presentations of the materials and pitched them to individual clients as well as to kindergartens. As soon as contracts started signing, Eematico created the whole program.

Funding for small business: Crowdfunding platforms

One of the funding sources that startup founders are becoming more interested in is crowdfunding via online platforms. However, these platforms can be of two different types:
  1. Cash for product pre-orders (for example, Kickstarter, IndieGoGo). This is one of the newer ways of funding a startup or just a new product. The general idea is that anyone can contribute money to help a business or project that they believe in. You can create a crowdfunding campaign by putting up a detailed description of your business, your main goals, a definition of the target audience, and the amount of funding you need and for what purpose. The more appealing you present your idea, the greater the chances you’ll get funded. But don’t expect miracles to happen! If you want to receive, you must give something back. Usually, it’s called pledges your promise of what you’ll give for a particular amount of donation. To offer your product as a pledge is one of the best solutions: your greatest fans will be the first to get your awesome product before it’s in the market and you’ll get a confirmation as to whether your product is worth that amount of money (this will help you to define pricing level for the future).
  2. Cash for equity (for example, AngelList, Seedrs, Crowdcube, Crowdbnk). These platforms allow contributors to provide you cash in exchange for a share of your company ownership. Literally, supporters are becoming investors and shareholders of your company, with all the rights and duties. These platforms differ from each other by how they structure the investment into your company and the locations where they can operate.
To get more information about opportunities on these platforms, visit them and check out their downloadable materials and intro videos. One thing you should be clear about is that you should not expect to use any crowdfunding platform as a stand-alone solution. If you want to get funded, you’ll have to put some effort into promoting your crowdfunding campaign instead of trusting your luck and attracting random visitors to the chosen platform.

Angel investors and seed firms

This is one of the most popular options for startup seed funding. Angel investors are wealthy individuals with significant experience and networks in a particular industry giving their own money to a startup project (typical investment might be $25,000100,000). Angel investors usually allow you to keep control over your company, but they oftentimes want a large portion of your equity, meaning when you make money, they also make money. Angel investors can give you not only seed money but valuable mentorship when it’s needed. They use their network connections to make your startup grow and start earning revenue faster. Although these investors can have a strong personal interest in your project, they have busy lives and other investments, so you will not always be able to rely on them for the support you need. Most early stage startups don’t limit themselves to working with one angel investors and try to attract several of them to have stronger overall support.

Seed firms are small venture capital funds that have professional, savvy investors and pursue investments on a full-time basis. The usual investment amount ranges from $250,000 to $1 million in a startup, therefore they have a greater financial interesting your success. The advantage is that seed firms have more money to give you later if needed. The downside of working with this type of investor is that seed firms may not always be the best experts in your industry plus they are involved and many other deals, but they might be willing to have control over your business decisions.

Startup accelerators and incubators

You might consider the possibility of applying to accelerators and incubators. There are plenty of them and their conditions are very different. Usually, an accelerator works with startups for a short and specific amount of time (90—120 days is most common). Accelerators also can offer startups a specific amount of capital (in most cases, it might be up to $20,000). In exchange for their guidance, capital, and some particular services, most accelerators require anywhere from 3 to 8% ownership of your company. Joining the accelerator is still not an all-inclusive solution to your startup funding. The main goal is to prepare your startup to raise larger amounts of capital. Accelerators try to grow the size and value of a startup as fast as possible and prepare it for an initial round of funding.

Incubators focus less on quick growth and help startups with mentorship often lasting more than a year. Usually, incubators do not provide upfront capital like accelerators and take little to no equity in your company. Many incubators are funded by grants through universities, allowing them to provide their services without taking some equity out of your startup. It’s far more difficult to get into the incubator because many startups are willing to get in there and receive help without losing part of their ownership. An incubator most likely won’t give funds to develop your startup, but being inside the incubator might help you to develop your startup much faster and attract investors from other sources.

Venture capital funds (VCs)

A venture capital (VC) fund is a professional group that looks specifically to fund startups. VC typically provides funding for early-stage, high-potential, and growth companies seeking to generate a return through an eventual realization event such an IPO (Initial Public Offering) or selling the company in any other way. This type of investor holds a lot of money available to invest in startups, but there are a few major downsides as well. Venture capital typically looks for larger opportunities that are more likely to be stable. It means that your startup should have a strong team and a need for few million dollars to scale effectively. To secure their investments, these funds might require having some level of control in your startup.

If you decide that VCs funding fits your strategy and you want to achieve success in fundraising, first of all, you should narrow the type of VC you are targeting. VCs are of different types and sizes. They can be categorized along a few main dimensions: size and purpose of the typical investment, location, and industry sector. Generally, there are few main types of VCs based on the purpose of the investment:

Early stage financing:
  • Seed financing is usually a small amount that enables a company to get a startup loan
  • The purpose of start-up financing is to finish the development of products or services
  • First stage financing is used when the company has spent starting capital and needs funds for taking business activities to full-scale
Expansion financing:
  •  ? Second-stage financing is used to begin a startup‘s expansion in a particular way
  • ? Bridge financing may be provided as a short-term, interest-only finance option as well as a form of monetary assistance to companies willing to employ the IPO as a major business strategy.
Acquisition/buyout financing (even though it is not a VC fund by itself, it might be worth to have this financial solution in mind):
  • Acquisition financing assists in acquiring a certain part of or an entire company
  • Management or, so-called leveraged buyout, financing helps a particular management group to acquire a particular product of even another company
Once you have narrowed down the list of targeted VCs, look at their most recent investments. Research how many investments they have made, what types of companies they invested in, and if they specialize in a specific sector or geographic location. Try to estimate the size of their investments, if possible. If your business closely matches with their most recent investments, that might be a good signal to proceed with figuring out how to approach these particular VCs.

Other possible sources

We have looked through all major possibilities of where your startup could get funded. But, if your fantasy is without limits, there may be some other, not so common possibilities:
  • Side businesses (your other business activity) can generate some revenue and fund your startup. It’s quite similar to funding a startup from your own assets, but in this case, if your startup is an established company, maybe you can provide some other services or products to earn cash for the main project?
  • Grants could be a great gift if your business focuses on a scientific or research oriented field. This financial aid is usually provided by governments to support particular causes. It might be worth some effort to research what grants you could apply for. For example, ERES Biotechnology got a $30,000 grant from the government of Turkey to find new and simple solutions for specific biotech problems. Their academic background was a large part of their success, but they didn’t stop after getting this grant. ERES Biotechnology actively sells their other services and products to the global market in order to raise money for further development.
  • Winning a contest might sound something like “OK, win a lottery and then launch your business.” There are many startup events, pitches or business plan competitions, and entrepreneurship fostering programs and contests where startups can win cash or other valuable prizes like professional services, free of charge. These events are taking place all over the world, for example, the Wolves Summit in Poland recently gave away $100,000 ($25,000 in cash and $75,000 in investment).
  • Vendor financing could help if you need tangible products for reselling or for using as components in your production. Many manufacturers and distributors can agree to defer your payment until these products are sold by you. This can’t be treated as a long-term financial solution but could help you to save money for a few months (depending on your creditworthiness, industry standards, and your negotiation skills).
  • Purchase order financing can solve the most common scaling problem faced by startups: they can’t accept a large order because they don’t have enough funds to build and deliver such a large amount of product. Companies providing purchase order financing service will often pay the required funds directly to the supplier, providing you the opportunity to complete the huge order.
  • Factoring accounts receivables help startups to get cash on sales immediately, rather than waiting for 30 to 60 days or longer for payment. Through this process, a service provider will front you the money on invoices that have been billed out, which you then pay back once the customer has settled its bill.

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Thought Leadership Zen: How to get funding for small business?
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