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How to Finance a Startup Business

Every entrepreneur’s challenges start with finding a way to finance the birth of a startup business before it can become a legend or at least profitable.

Traditionally, anyone with an idea for a startup has to plead and beg for investment. A bank loan was a constant challenge due to the exhaustive processes and stressful demands for requirements. Those with sufficient capital always have a significant advantage over entrepreneurs with a lack of funding.

How to Finance a Startup Business

But the landscape today has changed. Access to startup funds becomes easier with a broad range of choices, allowing entrepreneurs to become successful at a startup business borne out of a small home office or garage.

Others are triumphant in a guerrilla business style, bouncing from one hot concept to the next hottest trends in the market.

It’s a great time to start a business amidst the advent of social media, providing excellent platforms for marketing and selling products at minimal costs.

Types of Financing

Lack of funds to start a business should no longer be a barrier today.  We’ve come up with a list of the top sources for funding your business.

3F Funding

The easiest route to quick funds is the so-called ‘3F Financing’ from family, friends, and fools or strangers. According to a study, most startups sourced their funds from family and friends, and the average invested amount is $23,000.

Pros

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  • Quick access to funds without paper works.
  • It has flexible payment options based on agreed terms.

Cons

  • May affect friendship and relationships with the family members if the business fails and you also failed to pay on agreed terms.

Seed Financing

The first equity stage of a business is called seed funding. The seed-stage fund usually finances the research and development, raw product sourcing,  legal fees, business registrations, and other initial operational expenses.

Some financing schemes are limited only to the initial or setup stage of the business. Sometimes, this can be in the form of assistance on research and development or product procurement.

Pros

  • There are no monthly repayments on the seed funds.
  • Since this is not a loan, you still have the chance to get a loan to finance the next stage of the business.

Cons

  • Investors have a percentage ownership of the business proportional to their investment.

Venture Capital

Venture Capital is a private equity-type of financing from high-profile investors with a long-term outlook of the startup business. The support may not necessarily be in financial form. It could be managerial support or technical assistance.

Pros

  • All the raised money is yours, without repayment of the venture capital fund.
  • Access to the business expertise and networks of the VC investors.

Cons

  • You lose full control of the business since investors have a stake in your startup.

Bank loan

The traditional source of funds is a commercial or business loan from banks. However, the process is usually long and tedious unless you have enough credit line.

If you have a good business relationship with your bank, this is the best source to fund your startup business. Banks won’t interfere with how you use the fund. But you must also be diligent with your monthly payments.

Pros

  • It helps build business credit with the bank.
  • Full control of the fund.

Cons

  • Lots of paper works and some banks may require asset collateral.

Angel Financing

Some angel investors with a high net worth are willing to invest on startups with great potentials to become a legend. Angel financing is quite similar to seed funds, except the amount is bigger, anywhere from $25,000 to $100,000. You can also use the fund as you deemed fit beyond the initial stage of the business.

Pros

  • No monthly payments since the raised amount is not a loan.
  • You can leverage the expertise and networks of angel investors.

Cons

  • Angel investors have a stake in your business. They could also interfere with how you manage the startup.

Crowdfunding

A good way to boost the capital is by soliciting other potential investors to invest in your startup through crowdfunding platforms like Kickstarter, GoFundMe, and Indiegogo. The process is quick and straightforward.

But you have to make the business concept appealing to the investors. You also need to keep an eye on the fine prints of the platform. Some crowdfunding platforms have a target amount to achieve so you can keep the raised money. Otherwise, you’ll get nothing.

Pros

  • The pool of investors finances your business.
  • It allows you to test your business concept based on the reactions of the public with no or lesser financial risk on your part.

Cons

  • There is full or partial transparency of your business to the public, allowing anyone to steal your business concept.

Credit Cards

When no friends and family members are around to provide financial help, you can always run to your credit card for help with the needed funds. But this option is only ideal if you have enough credit line for the amount required from your business.

On the downside, maxing out your credit line may have a negative impact on your credit utilization ratio. Thus, affecting your credit score. It is best to have a credit card for the business, separate from your personal account.

Pros

  • You have quick access to money with no paper works.
  • No need for collateral. Some credit cards allow you to earn rewards.

Cons

  • This is not the cheapest option for financing.

Final Thoughts

You can always run to your family or friends for funds without worrying too much about regular monthly payments and exorbitant interest fees. But you also run the risk of impacting your relationship with them. If they are supportive and understanding, why not?

But there’s always the pride of being totally independent. If you want to do things on your own, you have other options based on what’s best for your business. If you’re at a loss on which path to take for the fund source, there are online resources like Myfin.us that can help you decide the best option for your startup business to thrive and become successful.

Frequently Asked Questions:

How do I fund a business with no money?

Search for financing options around you and choose the one with the best deal. But the easiest way to get funds for your business is to borrow money from friends or family. If this is not possible, there are other options, as mentioned in this post.

What are the sources of finance for a startup?

There several options for the sources of funds to finance a startup. Among the choices are bank loans, credit card cash advance, small business loans, venture capital, angel financing, and crowdfunding.

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