Learn about 8 smart ways to finance your startup. A good understanding of these methods will help you make more informed decisions.
8 Smart Ways To Finance Your Startup: Starting a business from scratch means taking on all sorts of unexpected expenses, not the least of which may be financing your company. The question of how to finance your startup can be one of the most difficult and stressful aspects of starting your own business.
8 Smart Ways To Finance Your Startup
One of the most critical ones as well, since securing money from outside sources can mean the difference between success and failure. There are many different ways to finance your startup, including money from investors or crowdfunding sites like Kickstarter, as well as loans and other financial tools designed specifically for small businesses. Here are eight smart ways to finance your startup that you may want to consider.
Start Out with Friends & Family
You’re not going to be able to live off $1,000 in savings, even if you bank all your revenue from Day 1. Instead, it may make sense to start out with friends and family — or take an advance on your credit card — and then turn a profit before you try pitching investors. If you plan on using friends and family as a source of funds for launching your business, get them involved early (ideally during idea generation) because if things don’t work out, it can be awkward later on.
Another option: Use services like Kickstarter or RocketHub. These crowdfunding platforms allow members of your network to contribute money directly; they might also help connect you with new fans or clients. But do keep in mind that these sites typically aren’t designed for ongoing projects. If you want to fund over time, consider taking preorders on your product or service before shipping anything out.
For example, if I raise $50,000 through my website over a 30-day period, I will manufacture and ship [this widget] to all who have ordered by June 1st, 2014. The downside is that getting people to pony up their cash upfront means no cash coming in until after you deliver your goods. But preorders are also great because they validate demand — meaning you know there are enough customers interested in what you’re selling so that others will probably want it too!
Seek Out Support From Local Businesses
Networking is one of those things that can feel like a chore at times, but in reality, it can be highly effective. Since most startup entrepreneurs are dealing with tight budgets, they shouldn’t hesitate to approach local businesses for support. Whether you’re looking for a partnership or simply financial backing, meeting with business owners and networking are key to securing funding for your venture.
The real world doesn’t revolve around fundraising events or conferences—chances are good there are scores of local businesses who would love to hear about your idea and support you from day one (especially if it involves them). Keep an open mind when approaching potential partners and don’t get discouraged if someone says no.
One person might not have any interest in your business, but another might see an opportunity to build something bigger together. For example, let’s say you’re starting a wedding planning service; reach out to florists, caterers, and photographers in your area.
Look Into Government Grants
Many governments have grant programs set up to incentivize and support innovation and development. If you have a great idea that aligns with an existing government program, there’s no harm in applying. For example, many countries in Europe offer programs dedicated to startups or small businesses operating within specific industries; they might not just be looking for innovative products and services.
But could also award funding to support your idea. Consider applying for grants through national or regional agencies as well as international organizations like UNESCO—and don’t forget about your local city council! Some of these programs are competitive, so if you have a good business plan and can show potential impact on your community, it’s worth putting in some time to apply.
Get Strategic About Loans
Investors and creditors will come to you when you’re ready for them, which is after your business has gotten off the ground. Up until that point, if you need funding or financing—and let’s face it, chances are good that you do—you can turn to friends and family members. (And if you don’t have enough of either, maybe think twice about going into business.)
Friends and family aren’t just sources of capital but also morale boosters. When they invest in your startup, they become ambassadors of goodwill who will encourage others to get on board as well. Just make sure you treat their investment with respect; that means giving them regular updates and being upfront about how their money is being used. If you don’t feel comfortable doing so, then it might be time to seek professional help.
Ask For Help from Universities
If you have a great idea but little money, it might be time to seek some funding from your university. Many universities now offer accelerator programs for student entrepreneurs looking to get their businesses off of campus and into cities. Participating in a program like this can provide you with valuable feedback, potential partnerships, and mentors who will help you build an incredible network that can help grow your business into a household name.
If your school doesn’t have an accelerator program, there are still resources available through your school that may be able to give you access to legal and accounting advice—and even other students who could potentially become involved in your project. If you need help finding these resources, contact your school’s office of entrepreneurship or business development. They should be able to point you in the right direction.
Leverage Credit Cards
If you have a decent credit score and can maintain at least a small amount of payment discipline, using a rewards credit card to finance your business is likely to be cheaper than any other loan option. Capital One Quicksilver cards, for example, come with an intro APR of 0% on balance transfers and purchases for 12 months. If you need to make an expensive one-time purchase or want to pay down debt without accruing interest charges, that’s a pretty sweet deal.
When it comes time to renew your cash advance, though (or if you run into financial trouble), that introductory rate will jump up to 23%. Make sure you keep track of when it’s coming due. It might be tempting to just let it slide—after all, paying $23 per $100 borrowed isn’t as bad as most personal loans—but late fees are much higher on these kinds of credit cards and they don’t care about your excuses.
The more important point here is that taking out a line of credit against future earnings could help your company get off the ground without putting you in massive debt right away. But you’ll still have to contend with monthly payments while waiting for sales figures to ramp up. At some point, too, these lines of credit will run dry unless you’re bringing in serious money; but again, even if they do max out, chances are good that sales will be high enough by then that a personal loan would be a better bet anyway.
Unlike traditional banks, crowdfunding sites are entirely customer-funded. Essentially, you create a profile and then tell people why you need money and what your goal is in exchange for monetary support. Crowdfunding websites like Kickstarter provide funding (if a project meets its goals) while sites like Indiegogo offer flexible funding or keep what you raise options.
Either way, it may be hard to explain why customers should fund your particular project but if you believe in it yourself (and can back that up with an outline of your plan), there are potential benefits to financing through these sites. First, there’s no credit check involved so you won’t have to worry about being turned down because of bad credit. Second, even though many sites charge fees ranging from 5% to 10%, they’re still much cheaper than most bank loans.
Third, by using these platforms you get access to investors who might not otherwise invest in your idea but could help spread awareness about it and bring more traffic to your website. Finally, if you meet your fundraising goal on one side, some will give you access to their network on other platforms as well which could lead to additional funds and exposure.
Applying to Accelerators/Incubators
Accelerators and incubators offer new companies a place to call home for about three months, where they’ll receive free office space, mentorship, networking opportunities, and other services. Applying can be a grueling process that demands plenty of your time, but there are ways to stand out from among hundreds of applications. Here are eight strategies you should consider before applying. It’s OK if you don’t use all eight—but make sure you at least try several of them.
Also Read: Best Way To Finance Buying A Car
Before you sign on with your first investor, make sure you’ve exhausted all other options. Funding will be a great headache if you can afford to avoid it.
Having an extra $100K from an early round of financing doesn’t mean much when your startup is in shambles and every day is a struggle for survival. You could be accepting that funding instead of heading out for Starbucks as soon as your late-night meeting ends.