Introduction
Starting a business can be a daunting task, especially when it comes to setting up a new business. Start-up costs are the expenses you will incur to establish yourself as a business owner. This could include things like the cost of equipment and software, permits, licenses, insurance, salaries, marketing, and payment for any other services you might need. In this blog post, we’ll discuss some of the best funding sources to consider when it comes to covering start-up costs. We’ll provide an overview of the different types of financing options available and some examples for each, so you can make an informed decision on how to secure the funds you need to launch your business.
Key points to remember
- Understand the different funding sources available
- Consider the benefits of different funding sources
- Learn how to access different funding sources
- Discover creative solutions to cover start-up costs
Government grants
Government grants are an option available to entrepreneurs looking to fund start-up costs. Many times the grants come without any repayment obligation. However, competition for government grants can be fierce, and qualifications and eligibility can be quite demanding. To ensure that you are eligible to receive grants, familiarize yourself with the grant requirements and submit only grant applications relevant to your needs. Here are some government grant options to check out.
Small Business Administration (SBA)
The Small Business Administration (SBA) is a great place to go for grants and other business-related assistance. The SBA helps small businesses start and grow by providing access to financial assistance, loans and grants, consulting services, contract assistance, and more. The grants and award programs offered by this agency are designed to help innovators and entrepreneurs start and scale their businesses.
Small Business Innovation Research (SBIR)
The Small Business Innovation Research (SBIR) program is a competitive program that offers grants and contracts to small businesses on an annual basis. This program enables small businesses to engage in research and development of new products that can have a positive effect on the economy. To qualify for grants, small businesses must meet certain criteria and comply with rules and regulations provided by the government.
State Level Grants
Each state has its own set of grant programs designed to help entrepreneurs and innovators start their businesses. These state-level grants are generally available to residents of the state who are eligible to receive the grant. Many local nonprofits, organizations, and other charities also offer grant programs that can be used to fund start-up costs.
- Conduct research to determine what grants are available in your state
- Check with local organizations, nonprofits, and charities to see if they offer grants
- Take advantage of state-level resources, like the Department of Economic Development
Crowdfunding
Crowdfunding has become an increasingly popular way to obtain funds for small businesses and startups. Its ubiquity has allowed people to take their projects globally without having to sacrifice equity or relinquish control.
Benefits of crowdfunding
- Ability to reach a global audience.
- No need to give up equity or control of a business.
- Speed and ease of fundraising.
- Test the viability of a product or service before investing resources.
Disadvantages of crowdfunding
- The competition is fierce and difficult to stand out.
- High risk of failure – The success rate is low.
- Time to launch and manage a crowdfunding campaign.
- Difficult to find a way to monetize the project.
Examples of successful projects
Crowdfunding platforms have served as a platform for a variety of successful projects over the years. Indie game projects such as “Double Fine Adventure,” the crowdfunding of a new album for nostalgia-rock fans “Reign of Z,” and the hardware product Waterpebble. All of these projects were able to achieve their goal and successfully execute their plans.
Angel Investors
An angel investor, also known as a business angel, is an individual who provides capital investment to small businesses in exchange for equity. Many high net worth individuals who have a keen interest in business are also angel investors.
Benefits of Researching Previous Investments
- Angel investors provide capital to cash-strapped businesses.
- Startups can benefit from the experience and expertise of angel investors.
- Angel investors provide valuable contacts for marketing and sales.
Disadvantages of researching past investments
- Angel investors often expect a high return on their investment.
- Angel investments come with strings attached, such as special voting rights.
- Angel investors can act as venture capitalists and try to control the business.
Bank loans
Bank loans are the most traditional source of funding for start-up costs and are an option for businesses with a good credit history. Potential eligibility requirements for bank loans may include cash flow, credit history, ability to pay, and annual income. Depending on the type of loan, other eligibility conditions may apply.
For example, the Small Business Administration (SBA) offers a variety of loan programs, such as the 7(a) loan program and the 504 loan program. The 7(a) loan program provides financial assistance to small businesses a wide range of uses, from business acquisitions to expansion. The 504 loan program assists businesses with long-term financing at a fixed rate for major capital investments and generally requires that a third-party lender also participate in the loan agreement. Additionally, businesses can apply for the SBA Express and CAP Lines programs, which offer expedited applications and decisions on SBA loan guarantees.
In addition to the SBA, banks offer several types of loans, such as term loans, lines of credit, and merchant cash advances, to help businesses finance their start-up costs. Term loans are short-term solutions with a fixed interest rate, while lines of credit offer businesses a certain amount of funds that can be withdrawn, repaid and re-borrowed. Merchant cash advances, however, are repaid in daily or weekly deductions based on business revenue.
Capital risk
Venture capital (VC) is a form of funding provided by investors to help startups launch and grow their businesses. VC is a higher-risk form of financing compared to traditional financing because it requires investing in early-stage businesses that may not yet have products, customers, or revenue. But the potential reward of a successful exit through an acquisition or IPO makes these investments attractive to a certain type of investor.
Benefits of VC financing
- Venture capital can provide startups with more up-front seed capital than debt or other more traditional financing options, allowing them to complete larger projects.
- The often rigorous due diligence process for securing a VC investment most likely means the startup has compelling plans for long-term growth.
- Having well-known professional investors on board can provide useful contacts for your business and provide marketing benefits such as additional media exposure.
Disadvantages of VC financing
- The most successful VC investments generally require a greater amount of risk and more resource demands than more traditional investments.
- In return for their investment, VCs often demand a controlling interest in the startup, which means founders could be squeezed in the long run.
- VCs typically remain active in the business, sometimes hiring key personnel and exercising other authorities, which can increase the workload for founders and reduce their autonomy.
Conclusion
Startup funding should be carefully considered by entrepreneurs. Knowing the different financing sources available and their pros and cons can help entrepreneurs find the right financing solution for their business. From traditional bank loans and venture capital to angel investors and C Corps, there are a variety of options to consider.
In addition to considering the different sources of funding, it is important for entrepreneurs to research a good business plan fit. Entrepreneurs need to think about who is the best fit for their business. Factors such as networking, who to approach and who understands the entrepreneur’s plan should all be weighed when looking for the optimal funding source.
Ultimately, the decision to select a funding source should not be taken lightly and entrepreneurs should spend considerable time reviewing their options. We’ve summarized some of the best sources of funding for startups and urged entrepreneurs to carefully consider their options and find the best fit for their businesses.