5 Alternative Ways to Fund a Start-Up Business
Don’t let funding stand in the way of pursuing your dreams.
Entrepreneur (äntrəprəˈnər): a person who organizes and operates a business or businesses, taking on greater than normal financial risks in order to do so.
This is the definition of “entrepreneur” as stated by Oxford Dictionaries. Becoming an entrepreneur is the dream of many, but even with the perfect business plan, exceptional drive, and mental capability, reaching this dream is not possible without the proper funding. Many once-hopeful individuals are discouraged when they realize how much capital their dream requires, and consequently, lose hope in starting their own business.
There are many ways to obtain the funding that your business needs; however, many of them require established financials, proven records, and what seems like your entire life savings as collateral. If you’re searching for safe, alternative ways to fund your business, check out these options:
- Angel Investors
- Crowd Funding
- Friends and Family
- Incubators
- Venture Capital Investors
Angel Investors are wealthy individuals who have in interest in investing in entrepreneurs and small businesses. These individuals usually provide capital in exchange for convertible debt or ownership equity. In many large cities, Angel Investors often come together and form Angel Networks. These networks have set procedures and processes that are used to select the entrepreneurs in which they will invest. The process starts with a business plan screening. Anyone who would like to receive Angel Investments submits their business plan to the Angel Network. After the business plans have been analyzed, the Investors will invite selected candidates to present their business plans in more detail and respond to questions. This step continues until all but a few entrepreneurs have been funneled out. At the end, Angel Investors can choose to invest money individually, as a group, or not at all. Depending on the contract between the Investor and entrepreneur, the Investor may not receive any reimbursement if the business does not succeed; therefore, many Investors offer to advise the entrepreneur during the first year to increase the business’s chance of success. If you are in need of some serious capital, could benefit from veteran advice, and don’t mind giving away a stake of your business, Angel Investing may be right for you.
Crowdfunding has become a popular way to fund a business over the last couple last decades or so. The first instance of crowdfunding was recorded in 1997 and in 2009, crowdfunding took off as one of the most popular ways to fund a small business. Entrepreneurs love crowdfunding because there is no risk to them. Websites such as gofundme.com can be used to raise money for almost anything from tickets to Disney World and pet bills to mortgage payments and money to start a business. Once you have created your campaign and shared it with friends and family, you can sit back and let social media do its thing. Some people reach, or even exceed their goal in just a few hours, depending on how many people the campaign reaches. When the funding goal has been reached, you can easily transfer the money into your bank account or request a check from the website. Usually these websites charge a small fee in order for you to get your money, but this is still a great option for those looking to fund their business while keeping 100% ownership.
Donations or investments from friends and family is another great way to fund a business. Presenting your business idea and plan to a group of loved ones can be daunting, but can also produce much of your needed capital. Friends and family are more likely to believe in your business idea because they know your personality traits, skills, and they want you to help you succeed. If you decide to ask your friends and family for capital, make sure your idea is worth their time and their money. Your business idea needs to be something that you believe in 100% and are willing for to work hard for. If your friends and family do not believe you will use their money wisely, they are unlikely to give you any. If you do receive funding from friends and family, enter into a legal contract with them that specifically states and explains if they are donating, investing, or gift giving and the terms of repayment, if any. Interest rates, equity ownership, payment plans, and consequences all need to be discussed and agreed upon before taking any money from friends and family.
One of the best ways to get a small business up and running is by getting into an incubator program. Business Incubator programs have become more popular over the last few years as more and more entrepreneurs are emerging. These programs usually offer individual office space as well as communal rooms in a large facility for selected entrepreneurs to come and grow their business for the first 2 years. Every member contributes to the rent, utilities and all other expenses in order to decrease each member’s individual overhead. Depending on the Incubator, members can have access to phones, unique products such as 3-D printers, computers, and many more tangible and intangible resources. A major benefit to business owners in Incubator programs is the mentoring and advice that is available from veteran and rookie entrepreneurs. Incubator programs also offer great networking opportunities and can be a stepping stone to obtaining investor funding. Although Incubators do not offer direct capital, they are a great place to grow your business for minimal costs while having access to top notch resources and mentors.
The last type of alternative funding is Venture Capital. Venture Capital funds pull together investor’s money and then invests it in small businesses. Venture Capital investors usual consist of financial institutions, investment banks, and other wealthy individuals that want to invest in small businesses. The entrepreneurs who use Venture Capital funding must give the investors equity in the company in exchange for the funding. Utilizing Venture Capital funding comes at almost no risk for the entrepreneur, but a very high risk for the investor because if the business fails, they lose their investment. However, if the business succeeds, the investor is able to make a return on his or her investment and still have a stake in the company. For an entrepreneur, if their business fails, they do not owe the investor anything, but if it succeeds, they have to share the profits until the investor sells his or her portion back to the business owner. This type of funding is ideal for business owners who do not want 100% of the financial responsibility of owning a business but still wants to make the majority of the decisions.
If you want to start a business but you are lacking the proper funding, explore some of the options above. The small business community is rapidly growing and barriers of entry are becoming easier to get around. Entrepreneurs can also take advantage of the Baby Boomers; many of whom are financially capable and looking for ways to invest their money as they reach retirement. Obtaining financial funding is a necessary and daunting part of starting a business, but by using these methods, you are sure to increase your chance of reaching your dream.