Raising capital for your startup is often the most significant barrier for your growing venture to secure a solid chance of success in the business realm. Even the most creative and promising startups crumble due to insufficient funding, especially during the first year of operation.
Yes, there may be a myriad of ways you can seek funding for your business. But which financing route fits your business model, doesn’t put restraints on your startup’s operation and importantly, are you aware of the risks if you fail to meet the financial requirements?
As you can imagine, it’s pretty overwhelming choosing an ideal source of business finance. Not to mention, it isn’t a walk in the park either. In this detailed masterpiece, we have pinpointed seven of the most favorable and prevalent funding options for startups along with their pros and cons to help you make an informed decision.
1. Crowdfunding Campaigns
In this fast-paced modernization era, if your startup’s operation and products are promising and appealing to the masses, crowdfunding might be the perfect method to pool investments from your backers. Even better, you will be raising awareness and publicity for your growing venture.
Crowdfunding platforms typically allow entrepreneurs to pitch out their business model and detailed description of their business to consumers through an online platform. Subsequently, if the public or consumers fancy the idea, they can make pledges to finance the business publicly and contribute to the cause.
Crowdfunding has recently garnered popularity and is stepping up as an ideal means for startups to source cash. In return, you can offer some incentives to your backers for the contribution. Alternatively, you can sell some securities or investment opportunities ( Equity crowdfunding ) to those who donate.
Also, debt crowdfunding offers a type of peer-to-peer lending. An interested patron can grant you a loan, payable with interest.
Pros of Crowdfunding.
- Through crowdfunding, you can raise capital for your startup while creating public interest and marketing it.
- You can get ideas and feedback on how to improve your product/services.
- It’s a perfect way to raise funding without upfront fees.
- It might attract venture capitalists if you mainly have a successful campaign.
- Setting up a crowdfunding campaign is a time-consuming process with no certainty of affluence. It’s ideal for startup’s that have gained popularity from consumers and have positive early traction.
- A failed campaign might damage your startup’s reputation.
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2. Angel Investors
People with money are always on the lookout for finding appropriate ways to spend their fortune. So it’s reasonable enough to capitalize on this goodwill wave to charge your startup for success.
Angel investors are a reliable source of capital for SMEs and companies in their early stages. Unlike other lenders, they offer favorable terms and business acumen to get you to the next big step.
If you understand who Angel Investors are and can deliver an excellent elevator pitch, you can get on a good side with them. For instance, Amazon, Google and Alibaba are some prominent companies that found their footing with angel funding.
- The utmost priority of most angel investors is helping startups find their footing rather than relying on the possible profits or returns they will accumulate.
- In most cases, you don’t need any form of collateral, repayments or interest.
- They provide mentorship and connections.
- It’s not a child’s play attracting the attention of angel investors. They clearly understand that startups have a high chance of failure. Nonetheless, and as mentioned, if you deliver a good pitch, have a promising venture, and clearly understand who these people are, you can get the funding to propel your business.
- They might not offer a substantial amount like venture capitalists.
3. Venture Capitalist
Akin to angel investors, venture capitalists are individuals or organizations willing to invest in ventures exhibiting great prosperity. Only that this is their profession, and they benefit when your enterprise succeeds. As you can imagine, they are appropriate for startups already generating revenues and with proven and scalable products/services.
You have to play by their rules, to the extent of managing your daily startup operations, and be willing to give up equity. Venture capitalists not only offer financial support but also offer sales and marketing advice, connections, access to valuable networking opportunities and business acumen in general,
- They offer substantial amounts of capital with no obligations for repayment.
- Opportunity for expansion of your startup.
- Easy to locate as there is existing documentation of them in various directories.
- Dilution of your startup’s ownership and control.
- Some VC’s need a high Return on Investments within a short time of investment.
4. Business Loans
An obvious go-to for financing. Business loans, especially traditional lending options, remain the primary way for small businesses to raise capital. However, not many startups meet the stringent criteria and requirements to qualify for a bank loan. In most cases, you will need a good credit score, have been in business for more than 24 months, incoming revenue and, notably, collateral.
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- Unlike venture capitalists and other equity investors, no one interferes with how you run your organization.
- No sharing profits.’
- Multiple loan options. For instance, working capital loans (a loan for running the complete cycle of revenue-generating operations ), Term loans, SBA loans, personal loans, invoice financing etc.
- Requires collateral. Consequently, there is a high risk of collateral loss.
- Not all startups are eligible.
- Tedious application process. Not to mention, there might be delayed disbursements of funds if approved.
5. Accelerating and Incubating
Although there are slight differences between the two, accelerator and incubator schemes can help grow your startup. Primarily, accelerators ( often funded by an existing company ) aim at providing selected startups with mentorship, education and resources to accelerate and scale them up. On the other hand, incubators might be more open-ended and provide startups with access to industry experts who can provide advice and training. In short, incubators tend to stimulate innovation.
All in all, they both offer an environment for collaboration and mentorships and are ways of raising capital for your startup. They are rapidly gaining popularity in major cities and could effectively raise capital for your startup.
6. Grants / Government Projects That Offer Startup Capital
As per most governments and nonprofits organizations, there are certain set funds to stimulate innovations, technological advancements, and economic activities. Applying for such grants and luckily qualifying for one can be a life savior considering you won’t have to pay or dilute your equity.
However, due to lots of competition and a lengthy process of scrutiny, approval and ultimate release of funds, grants can be hard to come along, especially in a critical moment when your startup needs immediate funding.
7. Other Ways of Raising Capital for Your Startup
As mentioned, there are a plethora of financing routes your yet-to-be-established venture can benefit from. We have just highlighted in detail the most common and top alternatives you can consider. Still, there are many others, including:
- Bootstrapping- You can fund your own business from the ground.
- Pitch competitions.
- You can source funding from Friends and Family members.
Entrepreneurs should be fearless in seeking the funding they need to get their venture off the ground. It may be a path filled with uncertainties and mortifications, but one can end up with a convenient deal of raising capital for your startup.