It is a fact of life for startups that they will require capital early in their lifetime in order to grow. It takes some time for a new company to become fully profitable, and losses are a matter of course in the early days. In the meantime, these companies will need to find some additional funding in order to make up for the shortfall before they start to make money. Here are four different ways for startup companies to obtain capital.
Loans
This may be one of the most advantageous ways for a startup to obtain capital. The only string that comes attached with the money is that it must be paid back with interest. Entrepreneurs do not have to yield any piece of their company in order to take out a loan. This funding source, while it is very desirable, may be difficult to obtain because banks are often hesitant to lend money to companies that lack a track record. However, this is a route that should at least be explored in any funding discussion. Loans are easier to obtain when the entrepreneur is willing to secure the loan with collateral. Startups also have better access to loans when they can get the Small Business Administration to guarantee the loan. Those who are creditworthy may have access to the Chenoa Fund.
Government Grants
The Small Business Administration helps new businesses of all types obtain money through a grants program. Usually, this business must be one that proposes to provide a valuable technology that furthers the government’s interest. The SBA can provide research and development funding and has a variety of programs to help businesses get off the ground. In addition, the SBA also endeavors to provide assistance to businesses that are owned by women, veterans and minorities. If a business is in a niche area, other government agencies may have programs to provide funding.
Venture Capital
There are always funds in the market that seek to provide capital to startup companies in exchange for an ownership interest in the business. Be prepared to have a detailed business plan and have to pitch to many different venture capital funds. This is because it may take some time to find the right fund to work and with and to get the best terms for funding. Another advantage of venture capital funding is that businesses get the benefit of management help from the fund. Obtaining this type of funding will require that entrepreneurs yield a percentage of ownership in their company.
Crowdfunding
Crowdfunding is rapidly gaining a place in the funding market for startups. It has become a viable option for those looking to raise smaller amounts of capital. When a business turns to crowdfunding for its funding, it has the ability to get better terms than it would if it went to a venture capitalist. This is suitable for companies that are looking to raise smaller amounts of capital. There are new SEC regulations that govern raising capital through crowdfunding. These rules provide protection to potential investors and have served the stimulate this marketplace. Now, there are online venues that can conduct capital raising in a transparent and effective manner. Companies can raise up to slightly over $1 million through this mechanism in a 12-month period.
There are a number of options available to startup companies looking to raise capital. The variety of avenues that startups can pursue make it easier to fund a business for those who have a viable business plan.