How to raise funding for your startup cleverly
No shocker here: Money is the bloodline of any business. As a startup every business needs access to capital, whether for product development, renting office or inventor and hiring the first staff. But lack of funding is one of the biggest challenges among many others which a startup founder has to face. Once an entrepreneur has idea, they look for angel investment as the primary source of investment. However, this is one of the last things he/she should try. Raising fund for startup is frustrating and time consuming. Even if you’re lucky enough to raise a round, you risk losing control in your own company by sharing equity with the investors.
Here we present you a comprehensive guide that lists 10 funding options for startups that will help you raise capital for your business without losing equity.
It all starts with you: Personal Financing
Starting a business is risky, and in many cases this level of risk is what prevents traditional lenders to finance entrepreneurs. This is made even more difficult if the startup owner hasn’t invested any of his or her own money. In the idea/experimental stage, you can use your own financial resources, such as money from a savings account or careful use of personal credit cards. If possible try to sell products and services to generate some to keep going form start. This method also validates the idea that there is a need of your product in the market and people are ready to pay for it.
If you have savings or own your home and are willing to refinance or take out a second mortgage, then these are options you should definitely explore if you're comfortable with the potentially bad consequences.
Friends and Family
It's often said that you should never go into business with family, but that doesn't mean you can't borrow money from them, right? If you don’t have your own savings or credit cards – or you do, but your growing business needs additional funding – all is not lost.Yourfriends and family have a vested, personal interest in watching you succeed. This might make them more willing to invest in your business, especially in the beginning. Consider inviting family and friends to invest in the company with the understanding that their money may not be returned.This is also a smart way to raise fund as unlike institutional investors it’s easy to convince them and there is not much song and dance involved in getting the fund. In most cases, these friends and family are investing in you, not your business. Both parties should think of this investment as a grant with no strings attached. If the enterprise succeeds, a reward to these risk-takers would be a nice gesture. Taking money from friends and family, however, can be tricky, and all of the pros and cons should be scrutinized before deciding to use this method to generate funds.
A similar method as P2P, crowdfunding help you to get people to invest in “your solution” in exchange for some rewards (other than money).Currently, it’s one of the most popular way to get funds as the money is not repaid. The rewards for donors range from receiving your first products to having a product named after them. Crowdfunding is very emotional and its success is based on the appeal of your idea. Popular sites that facilitate crowdfunding are Kickstarter and Ketto. Each site has its own pros and cons so before associated with one better investigate.
Getting a loan for a young startup that has not launched yet is near impossible, unless you have the collateral (personal assets) to assure the bank that they will not go empty handed when you default on your loan. This is definitely the most unpopular choice among Startups. This does not, however, mean that you are out of options to fund the growth of your company.
Start a side project
Although this is not a very good idea to do. But this is what the founders of AirBnB were in a similar position in the early months of their startup. They had a bit of cash coming in, but not enough to sustain themselves. Their backs were against the wall. They started brainstorming ideas to bring in extra income during the Democratic National Convention. What did they come up with?
Obama’s and Captain McCain’s Breakfast Cereal
They hustled. That breakfast cereal idea brought in an extra $30,000 in needed cash and helped build a company worth over a billion dollars.
If your business is based purely on the selling of a single product, the easiest way to raise the money to produce the product may be to pre-sell it. By pre-selling your products, you can be sure not to make too many and have a warehouse of unsold goods. It also keeps you aware that there are consumers relying on you to follow through.
This level of pressure can be a little intimidating for some entrepreneurs, so take time to consider the ramifications of collecting money before providing a product. You will need to have a solid timeline in place and adhere to it. Otherwise, customers might demand their money back, which could lead to a variety of problems.
In this small loans up to $10,000 are granted by institutional to individual who would not normally qualify for a traditional bank loan. Loans are based on your experience, passion, market opportunity and sales. Organizations include Accion USA, Grameen Bank and Kiva. Remember: It is a good alternative if you have an appealing idea and need a small about of money.
Business plan competitions or other contests
When all else fails, try to win the money! There are a lot of regional and national level competitions giving away substantial amounts of money. There are numerous hackathons, business plan contests, and relevant awards for small businesses and startups around the country. The trick is to find the one that makes sense for your business. There may be specific contests for your alma mater, city, or state. Check your school’s center of business or entrepreneurship or your city/state economic development center to see if there’s a contest right for you. Remember: This is really show business that loves a great idea and very competent team. You also need to be a good presenter.
Believe it or not, there are organizations out there that offer monetary rewards—or even financing—for businesses and entrepreneurs who enter some contests. Eligibility requirements, entry fees and judging criteria vary widely. But if you have confidence in your idea and your pitch, this might be the way to get some cash.
Peer to peer lending (P2P)
It is now possible to go online and get funding from people you do not know at sites such as Prosper.com and Lending Club. The amount paid for the loan depends on your credit score, the economy, the length of the loan and “your story.” Remember:P2P loans are not easy to get and the interest rates can be very high.
This method allows you to sell your accounts receivable to a third party (i.e.The Receivables Exchange) for immediate cash. It’s a $150 billion industry and goes back to the ancient time of Babylonia.Remember: Factoring is expensive since it can cost up to 15 percent of the receivable. This may work for a growing company, but is not a method of financing for a company that is shrinking or losing money.
Purchase Order Financing
Many different factors can affect a business’cash flow, including seasonality and supply and demand. For example, some companies may find themselves unable to fulfill a large order due to a lack of funds to purchase the materials needed to produce the goods.
In these instances, purchase order financing might be the answer. A purchase order financing organization will essentially extend an advance so the organization can purchase the materials it needs today and then collect back the money once the goods are sold.
Companies that most often qualify for purchase order financing are those that deal in manufactured goods—not services—and that stand to make a margin of 20% or more on the sale.
Money shouldn’t be an objection when you’re starting a company.Be creative.Use your resources and do things that don’t scale.