How to Decide the Best Way to Fund Your Business
How to Decide the Best Way to Fund Your Business
No matter what kind of business you’re starting, what your growth model is, or what kind of team you’re starting with, you’re going to need money to get started. These days, it’s possible to launch a startup on a razor-thin budget, working remotely so you don’t have to pay for an office, scrapping together resources you already have, and working with the smallest team possible. Even then, you’ll need thousands, if not tens of thousands of dollars to get what you need to build early momentum.
Fortunately, there are dozens of different ways you can fund your business. But this presents a problem of its own. With so many possibilities, and all of them having strengths and weaknesses worth considering, how do you ultimately decide the “best” way to fund your business?
Funding Options for Your Business
You can start by charting out some of the most common and popular ways to fund a business.
These include:
- Venture capital. One of the most popular choices for startup entrepreneurs is working with a venture capitalist (VC). VCs can be individuals or firms, dedicated to investing in small companies. VCs tend to have a lot of available capital, making them an ideal choice if you’re looking for a big injection of cash – though they broker smaller deals as well. Oftentimes, the VC will provide funding in exchange for equity in the company, forcing you to share profits later on and/or forfeit some degree of control. Additionally, VCs can be extremely competitive, making it difficult to stand out from the competition.
- Angel investors. An angel investor is an individual (and usually a wealthy one) who is willing to invest in small businesses. Angel investors aren’t as dedicated to the practice as VCs, so there’s often less competition for their attention. However, they may be harder to find, depending on where you live. Still, angel investors work much like VCs, providing promising young ventures with money in exchange for partial equity and/or some control in the business. Some angel investors also serve in a mentoring capacity, providing direction and advice to growing young entrepreneurs.
- Crowdfunding. Crowdfunding is another popular option – and one that wasn’t available 15 years ago. The idea here is to attract small amounts of funding from a large number of micro-investors, rather than working with one wealthy individual or large firm. This distributed model often makes it easier to get the funds you need, but there are a couple of logistical hurdles. For starters, crowdfunding is restricted; you may find it difficult to pursue equity crowdfunding, and some popular crowdfunding platforms are particular about the types of projects they host. You’ll also need to think carefully about how you market your business; your positioning will play a massive role in whether contributors decide to donate to your venture. You may also be beholden to your investors in some way, responsible for fulfilling a promise with the money you’ve received.
- Personal funding. If you like the idea of being more independent, you can attempt to fund the business yourself. If you’ve accumulated wealth over the years, this may be a straightforward practice. Otherwise, you’ll need to get creative to summon the money necessary to get your business moving. For example, you could sell a major asset (like a home) and use the proceeds to launch your startup. You could also cash in a 401(k) or similar retirement platform (though this isn’t recommended).
- Grants and loans. Sometimes, you can fund a business with the help of grants and loans. Resources like the Small Business Administration and local Chambers of Commerce can help connect you with special programs meant to incentivize business creation. On top of that, you can work with your bank to review loan options, and potentially open a floating line of credit you can tap into as you continue to help your business grow. Of course, the downside here is that many loans require repayment with interest, and if your credit isn’t strong or if you borrow too much, it can eventually become a burden.
- Special loans. Depending on your personal circumstances, you may qualify for special types of loans that can provide you with capital immediately – and not require you to pay interest for some time. For example, if you’re in the middle of a personal injury claim, you may qualify for pre-settlement legal funding, which can give you capital immediately that you won’t have to pay back right away. Use these proceeds carefully if you decide to go this route.
- Partnerships. You may also choose to fund your business with the help of a partnership. Securing a business partner who has more money to put into the business could be exactly the cash injection you need to make the startup work. Of course, that also means you’ll need to feel comfortable working with a partner over the long-term development of your company.
Determining Your Priorities
Clearly, each of these options has something going for it – and many of them have significant drawbacks that weaken them. So how are you supposed to make the decision?
- Capital requirements. First, lay out the capital requirements of your business? This may seem like an obvious question, but too many entrepreneurs enter this space with only a vague idea of what they truly need. Spend some time developing a business plan and sketching out the financial model. Be prepared to ask only for the funding you need.
- Desire for control. How much control do you want to retain over your business? Would you be okay with heeding the direction of investors? How much power are you willing to forfeit to get the funding you need?
- Type of business. What kind of business are you hoping to start? Is there a flexible approach that can help you get access to more options? For example, can you start as a local company before expanding nationally to reduce your initial capital requirements?
- Personal savings. How much do you currently have available in personal savings? Are you capable of funding this business independently, or are you totally relying on external sources of funding? How much would it take to close the gap?
- Risk tolerance. Consider your personal and business risk tolerance. Do you have a backup plan in place? What would happen if things go wrong?
- Hybrid options. There are usually few restrictions on the number of funding methods you can pursue simultaneously. If you want to compensate for the weaknesses of one funding method, consider simply supplementing it with another, complementary method.
Getting Started
If you’re just getting started and you’re need help making this decision, these are the most important steps you should take:
- Develop your business plan. Take the time to write your business plan and pay especially close attention to the financial section. Here, you’ll be able to calculate exactly how much funding you need, what your risk tolerance is, and more.
- Play with your options. Spend some time evaluating your options. Consider the primary sources of funding available to you and how they might affect the management and future growth of your business. Compare these hypothetical situations to each other and see if one stands out above the rest.
- Network. Finally, spend time professional networking. Building your network is never a bad thing, and it can introduce you to many potential partners and investors. If nothing else, you’ll meet peer entrepreneurs and business owners who can share their experiences and give you perspective on the world of funding.
Choosing a mode of funding for your business is one of the most stressful and impactful decisions you’ll make as a new entrepreneur. But if you put the time into this decision and take it seriously, it can help support your startup’s growth for years to come.
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