Startup Funding Options for Your Business

[djbaxter]

5 Startup Funding Options for Your Business
By Richard D. Harroch and Mike Sullivan, AllBusiness.com
Dec 20, 2019

An essential element of startup success is your ability to obtain sufficient funding to start and grow the business. While many people finance their new companies with their own capital or by borrowing money from family or friends, there are other options available. But startup founders must understand that raising startup funding is never easy, and usually takes longer than anticipated.

1. Angel Financing
Angel investors are typically individuals who invest in startup or early-stage companies in exchange for an equity ownership interest. Angel investing in startups has been accelerating, and high-profile success stories like Uber, WhatsApp, and Facebook have spurred angel investors to make multiple bets with the hopes of getting outsized returns. The typical angel investment is $25,000 to $100,000 per company, but can go higher.

Here is what angels particularly care about:

• The quality, passion, commitment, and integrity of the founders
• The market opportunity being addressed and the potential for the company to become very big
• A clearly thought out business plan, and any early evidence of obtaining traction toward the plan
• Interesting technology or intellectual property
• An appropriate valuation with reasonable terms (angel investors are investing at an early stage when risk is highest, so they typically require lower valuations to compensate)
• The viability of raising additional rounds of startup funding if progress is made

There are a variety of ways to find angel investors, including through:

• Other entrepreneurs
• Lawyers and accountants
• AngelList
• Angel investor networks
• Venture capitalists and investment bankers
• Crowdfunding sites like Kickstarter and Indiegogo

The best way to find an angel investor is a solid introduction from a colleague or friend of an angel. Use LinkedIn to determine what connections you may already have. Angel investors are much more likely to invest if they know your sector well, so it often helps to start with your connections in that sector.
Serial entrepreneurs with successful past liquidity events are often some of the best angel investors—they have the cash to invest, but in addition to cash they also often bring other important benefits to a startup relationship, such as:

• Contacts to venture capitalists
• Contacts to strategic partners
• Advice and counsel
• Credibility by being associated with the investor
• Contacts to potential customers
• Contacts to potential employees
• Contacts with lawyers, banks, accountants, and investment bankers
• Knowledge of the marketplace and strategies of similar companies

For a comprehensive discussion of angel investing, see Angel Investing: 20 Things Entrepreneurs Should Know and 15 Expert Tips for Startups Seeking Angel or Seed Financing.

2. Crowdfunding
“Crowdfunding” is the practice of raising funding through multiple funders, often via popular crowdfunding websites. Crowdfunding gives startup entrepreneurs the opportunity to raise startup funding for their business, and can help a company promote its products or services. Setting up a crowdfunding campaign is not very difficult. You set up a profile on a crowdfunding site, describing your company and its business, and the amount of money you are trying to raise. People who are interested in what you are trying to do can donate to your campaign, typically in exchange for some kind of reward for their donation (one of your products or services, a discount based on how much donated, or some other perk), or for some form of equity or profit share in your business. ....

Each crowdfunding site charges some kind of fee to list your campaign, either a processing fee or a percentage of the funds raised. Some of the most popular sites include:

• Kickstarter
• Indiegogo
• Crowd Supply
• Crowdfunder
• SeedInvest
• Crowdcube
• Fundly
• GoFundMe
• iFundWomen

See Is Your Startup Ready for Equity Crowdfunding? 7 Questions to Ask

3. Small Business Credit Cards
A number of credit card issuers specifically cater to the small business market, and many come with special benefits: cash back rewards, airline mileage points, and other perks. Some issuers require that the card be tied to the owner’s personal credit score and credit history and a guarantee from the owner. This would mean, of course, that any defaults or late payments on the business credit card would affect your personal credit rating.

4. Venture Capital
Startups seeking financing often turn to venture capital (VC) firms. These firms can provide capital; strategic assistance; introductions to potential customers, partners, and employees; and much more. Venture capital financings are not easy to obtain. Venture capitalists typically want to invest in startups that are pursuing big opportunities with high growth potential, and that have already shown some traction; for example, they have a working product prototype, early customer adoption, etc. ....

VCs get inundated with investment opportunities, many through unsolicited emails. Almost all of those unsolicited emails are ignored. The best way to get the attention of a VC is to have a warm introduction through one of their trusted colleagues, or another professional acquaintance of the VC, such as a lawyer or fellow entrepreneur.

For a comprehensive discussion of venture capital financings, see A Guide to Venture Capital Financings for Startups.

5. Small Business Loans
Small business loans are available from a large number of traditional and alternative lenders. These types of loans can help your business grow, fund new research and development, help you expand into new territories, enhance sales and marketing efforts, allow you to hire new people, and much more. There are multiple types of small business loans available, and options vary depending on your business needs, the length of the loan, and the specific terms of the loan:

• Small business line of credit. Under a small business line of credit, your business can access funds from the lender as needed. There will be a cap on the amount of funds accessible (e.g., $100,000) but a line of credit is useful for managing a company’s cash flow and unexpected expenses. There will typically be a fee for setting up the line of credit, but you don’t get charged interest until you actually draw down the funds. Interest is typically paid monthly and the principal drawn down on the line is often amortized over years. However, most lines of credit require annual renewal, which may require an additional fee. If the line is not renewed, you will be required to pay it in full at that time.
• Accounts receivable financing. An accounts receivable line of credit is a credit facility secured by the company’s accounts receivable (AR). The AR line allows you to get cash immediately depending on the level of your accounts receivable, and the interest rate is variable. The AR line is paid down as the accounts receivable are paid by your customers.
• Working capital loans. A working capital loan is a debt borrowing vehicle used by the company to finance its daily operations. Companies use such loans to manage fluctuations in revenues and expenses due to seasonality or other circumstances in their business. Some working capital loans are unsecured, but companies that have little or no credit history will typically have to pledge collateral for the loan or provide a personal guarantee. Working capital loans tend to be short-term loans of 30 days to 1 year. Such loans typically vary from $5,000 to $100,000 for small businesses.
• Small business term loans. Term loans are typically for a set dollar amount (e.g., $250,000) and are used for business operations, capital expenditures, or expansion. Interest is paid monthly and the principal is usually repayable within 6 months to 3 years (which can be amortized over the term of the loan or have a balloon payment at the end). Term loans can be secured or unsecured, and the interest can be variable or fixed. These loans are good for small businesses that need capital for growth or for large, onetime expenditures.
• SBA small business loans. Some banks offer attractive low-interest-rate loans for small businesses, backed and guaranteed by the U.S. Small Business Administration (SBA). Because of the SBA guarantee, the interest rate and repayment terms are more favorable than most loans. Loan amounts range from $30,000 to as high as $5 million. However, the loan process is time consuming with strict requirements for eligible small businesses. Visit the SBA website to see a list of the 100 most active SBA lenders.
• Equipment loans. Small businesses can buy equipment through an equipment loan. This typically requires a down payment of 20% of the purchase price of the equipment, and the loan is secured by the equipment itself. Interest on the loan is typically paid monthly and the principal is usually amortized over a two- to four-year period. In addition to equipment, these loans can also be used to buy things such as vehicles and software. Loan amounts normally range from $5,000 to $500,000, and can accrue interest at either a fixed or variable rate. Equipment loans can also sometimes be structured as equipment leases.

For a comprehensive discussion of small business loans, see 10 Key Steps to Getting a Small Business Loan.

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[clare james]

When I first started my own business, getting funding felt pretty overwhelming because my credit wasn’t exactly great. I tried the typical routes like talking to banks, but they wanted spotless credit and loads of documents I just didn’t have at the time. In the end, I had some luck with alternative lenders who were more flexible, even though the rates were a bit higher, it got my project off the ground when traditional lenders wouldn’t touch my application.

I know finding calgary loans for bad credit isn’t exactly easy, but there are actually legit places out there that look at your business potential, not just your credit score. I went down that path last year and it really helped me get moving and build a bit of momentum.