You’ve had that brilliant idea for a business for years now. Whether it’s the clever app that’s going to revolutionize how we get a date, the vegan taco/pizza/pancake truck, or the self-walking dog leash that scoops the poop for you, you know your idea can not only change the world…but change your life (and your bank account) forever.
But, then enters the age-old question…”how am I going to pay for it?” Real businesses take real money to get them up and running. Whether it’s hiring an attorney to do patent research, a marketing team to get the word out, or even a design team to help you prototype, an idea will remain an idea until you have the proper funding to turn it into something real.
So, how do you do that? Well, only a few years ago, you basically had two options.
- Slog down enough egg nog at the Christmas party to get the guts up to corner your rich, lawyer uncle and “hail mary” your business plan under his nose.
- Slap on a suit and march down to the bank in hopes of proving your idea is loan-worthy, even if your car, house, and cats have to serve as collateral.
Fortunately for us, those days are long gone. Welcome to the future of small business funding.
Over the last few years, several options have evolved into legitimate models for acquiring the money you need to get your business off the ground. What follows is a primer on 5 distinct categories of business funding that you can explore, and in some cases, take advantage of no matter your business, your timing constraints, or your personal credit.
Each type of funding has its own advantages and disadvantages, so explore each careful to determine which makes the most sense for your individual situation.
Angel Investors & Venture Capital
Although these two models have their differences, each revolves around the fact that you are offering an investor an amount of equity (a.k.a. a percentage of profits for a certain length of time, even forever) in your business in exchange for an infusion of capital. This describes the kinds of deals you see on Shark Tank. For example, a private investor might offer you $50,000 in exchange for 20% ownership in your company and/or its profits.
The difference between angel investors and venture capitalists is fairly simple. Angel investors tend to be individuals who have a high net worth and invest in companies for fun, profit, and personal interest. This could be the rich dentist who’s bored with golf and sports cars, but wants to help two young inventors from his home state with their new robotic toothbrush. They would create an arrangement where he fronts them a certain amount of money, and in exchange, he receives a return on his investment via the profits they make after expenses. If they don’t succeed, he loses his money, but the inventors don’t owe him anything (unless otherwise specified in their agreement).
A venture capitalist, however, is less of a hobbyist. She is a shrewd and seasoned investor who chooses investments more on the likelihood of turning a very specific return on her investment. The VC is more focused on making a return over helping out someone for whom she has a soft spot. However, she typically has developed strong business acumen and can serve as a mentor for the young entrepreneur. However, it’s still a situation where, typically, investment is traded for equity and the entrepreneur doesn’t have to pay anything back.
This type of funding has come into greater popularity over the last few years with the advent of platforms like IndieGoGo and Kickstarter. Crowdfunding focuses around generating cash via a social campaign. In return, the entrepreneur offers boosters both advance access to the product or service, as well as specific rewards.
Business owners have used crowdfunding to help cover everything from design and building costs to even travel expenses to get their product or service created. At the time of publication of this post, the highest-grossing crowdfunding campaign was the video game Star Citizen, which raised $109,010,029. Yes — that’s nearly $110 MILLION.*
However, it’s not as simple as slapping up a Kickstarter page and expecting generous, anonymous donors to fall into your lap. Successful campaigns often become full-time jobs, with the entrepreneur often employing major marketing agencies to help them plan, create and execute their campaigns. That said, crowdfunding can result in some very serious wins…even into the millions.
Let’s begin by clarifying that although we’re including all Government-related loans under one heading, they’re not all the same.
The major player in government loans is the Small Business Administration or SBA. The irony? The SBA doesn’t even issue loans. Instead, it provides loan guarantees to entrepreneurs and small businesses, issuing a guarantee to the borrower’s bank to pay back a certain percentage of the loan if she/he is unable to do so.
The federal government isn’t just being nice…it has a vested interest in helping small businesses grow and flourish. As a result, the requirements of certain SBA loans are less stringent in terms of the owner’s equity and collateral than commercial loanss. Therefore, this makes the SBA an excellent source of financing source for startup businesses. And in many cases, the SBA will guarantee loans for smaller sums than most banks are willing to lend on their own.
Peer-to-Peer (P2P) Lending
Peer-to-peer lending, often abbreviated (P2P), is a relatively new phenomenon. Instead of going through an institution, a borrower is matched with an individual lender through an online service. These are typically unsecured loans (no collateral required).
This model of lending provides benefits to all parties involved; lenders often earn higher returns than other investment vehicles, borrowers have access to lower interest rates than banks, and the P2P lending company profits through marginal fees on each match they provide.
Frequently, the P2P platform is responsible for checking the credit of the borrower and matching them with the appropriate lending source. Fear not, however, if your credit isn’t in the best shape. There’s a match for everyone; the terms will just vary.
So, Where Do I Start?
Take a good look at your individual circumstances and your ideal situation. Are you willing to give up a small piece of your company in order to avoid the stress of being strapped with business debt for a few years while until you become solvent? Do you have the time and resources to craft a successful crowdfunding campaign?
You have more resources than any other time in history to get the money you need to get your startup up and running. I suggest you take some time to explore different platforms and funding sources to determine which is the best fit for you.
My team has compiled a comprehensive guide called 154 Sources of Business Funding. We’ve compiled as many funding sources as we could find across all styles discussed above, and it’s available to you at no cost. Click here to learn more.