These Are the Best Options for Funding Your Startup Company
We’ve written ad nauseum about the importance of business cash. Your company’s cash flow is as important as blood. Without an inflow of cash — whether it be a large lump sum or a smaller and more consistent influx — your company is dead in the water.
But we’re preaching to the choir. You know as well as we do about the importance of working capital, operating cash flow, and operating leverage. The question, however, remains: How do you generate capital when you’re a startup focused on growth?
Well, you already understand the value of a friends and family round, angel investors, and venture capital funds. You’re a startup! Investment rounds are your forte. But there are, of course, many other financing options to help you with funding.
So, to spare you the agony of reading what you already know, we’re going to quickly touch on the more “traditional” forms of startup funding and then move onto options you might not have considered.
Friends and Family
There’s a reason why this type of financing is also considered “the three F’s: friends, family, and fools.”
Friends and family rounds of financing usually come before an angel round and are used to create an MVP or to prove the concept of you business model. But, since most of your friends and family probably aren’t business savvy, there’s a lot of hesitation with this type of financing.
There’s also the risk that your business fails. If it does, some uncomfortable conversations might ensue with those who are closest to you. To combat this issue, if you open a friends and family round, try to keep the investors to those who understand business and are looking to invest in you or your startup.
Otherwise, you might want to structure the investment as a personal loan, so even if your business fails, your family knows you’ll repay them.
Angel Investing
Angel investors, as you know, are private investors who seek investments in early stage companies. Angel investors are usually considered “strategic investors” because in addition to their money, they’ve also often had success in your company’s industry.
This is why accepting an investment from an angel is as much for strategy as it is for cash flow. In fact, many believe that the insight provided by an angel investor is more valuable than the monetary investment itself.
Angel investors are accredited investors and are a better option than your friends and family, if it’s possible to get one to invest.
Venture Capital Funds
Venture Capitalists seek startups that have both high growth as well as high risk potential. This type of financing usually comes after an angel round or a friends and family round. So, if you haven’t yet raised a smaller round and built out a proof of concept, this type of funding is probably not yet right for your business.
However, if you can open a Series-A investment round, the payoff could be huge. While most smaller rounds consist of numbers below $1 million, VC rounds, even in the initial stages, can reach tens of millions of dollars, if the company is worth it.
SBA Loans
Ok! We’ve now gotten through the funding option you were probably already familiar with. That’s not to say you aren’t familiar with the rest, only that they’re used less when a company looks for funding.
SBA loans are loans offered by the Small Business Association. These loans can be applied for online and usually take less than a few days for approval. Just remember that if you go this route, you’ll be required to pay a monthly interest charge just like any old loan. You also might have to personally guarantee the loan if your business doesn’t have adequate credit.
Microloans
Microloans are similar to SBA loans except for the fact that they’re geared toward borrowers who are low income earners or have a low credit score.
Microloans are usually taken out by people or businesses who can’t obtain traditional bank financing. However, these loans are becoming increasingly more popular with entrepreneurs because they offer just enough as a lump sum to help a company survive until it can create an MVP and get an investment from a VC or something similar.
Small Business Credit Cards
Small business credit cards are a great option for financing your business if you need short-term cash. Just remember that your personal social security number is linked to the account along with your business’s tax ID number.
So, if you miss your monthly payments or the card becomes delinquent, your personal credit is affected. However, if you need to supplement your cash flow for a month or two, then a small business credit card is great.
These cards also offer business perks and rewards, so even if you have to pay a late fee or two, the cash back rewards and other perks you receive might offset the charges.
Factoring
Factoring is a bit complicated, but you’re an entrepreneur, so it’s probably not complicated for you! With factoring as a funding option, a service provider pays you for your outstanding A/R invoices, which you pay back when customers have settled the bill.
The idea here is that the factoring company “purchases” your A/R at a discount, and then makes its money when the invoices are paid in full. Still, factoring gives you the lion’s share of your invoice amounts, meaning that you might only sacrifice 5% in order to speed up your cash inflow. Not a bad tradeoff!
Crowdfunding
Finally, crowdfunding is a good option if you’re trying to fund your startup. Websites like Kickstarter and Indiegogo allow people and businesses to launch crowdfunding “campaigns,” where people pay up front for a product or service to be delivered later.
So, if you’re still looking to build out an MVP or prove your business concept, it might do you well to launch a crowdfunding campaign. Even if you break even on the product sold, you’ll have valuable data and consumer insights that you can use to raise a larger round with a VC.
