Creating a startup business is often a daunting task, one that involves taking significant risks and working incredibly hard. Perhaps the most challenging thing for most startup founders is the task of raising adequate capital to launch the new startup and get it to the point of profitability.
1. Angel Investors
These investors are always looking for new businesses and ideas to invest in financially. This sets them apart from some other sources of funding who consider funding a startup to be an unusual risk that they must be convinced to take on relative to their other investments. Angel Investors typically seek a percentage stake in your company’s equity in exchange for their investment. Angel Investors and any investments they make must appropriately register with the Securities and Exchange Commission (SEC), which regulates these transactions.
Many of the largest technology companies in the world today were successfully funded by Angel Investors. Some notable examples of Angel Investor-funded startups that eventually became massive tech companies include Google and Yahoo.
2. Venture Capitalists
As with Angel Investors, Venture Capitalists (VCs) seek to invest in new up-and-coming startups that have a lot of potential for growth and investment returns. They will also ask for a percentage share of the startup’s equity.
Venture Capitalists may often also be interested in having a say in the way the company is managed and operated, and the direction it heads. This is because these investors often have a great deal of experience in building successful startups, and do not wish that experience to go to waste, especially when a substantial investment is on the line.
3. Small Business Administration Loans
Successful businesses pay a lot of taxes, and the U.S. government always wants to get their share of the action. Because of their vested interest in the success of businesses, the U.S. government has established the Small Business Administration loan to provide a variety of different loan types to those seeking to develop new businesses in the United States. If you are founding a non-profit, they also offer grants to those as well.
4. Startup Competitions or Contests
While this should not be your first choice of funding, if your startup idea and business model is particularly groundbreaking or original, you may be able to be awarded funding as part of a competition or contest. Many organizations provide financial rewards or even financing for startups who participate in their contests. The variables of these contests vary widely, so be sure to check out any applicable judging criteria, entry fees, or other requirements before entering.
If you are confident your idea and pitch are ready for some scrutiny and competition, this could be a fun and exciting experience that could help you raise some extra funding.
5. Vendor Financing
If your business is is contingent upon suppliers to produce, you may be able to negotiate longer payment terms from your supply vendors. Vendors will typically require you to pay them within 30 days of receiving an invoice before they begin charging late fees and penalties, such as interest. If you have a sales cycle that is longer than 30 days, you may be able to explain that your business requires 45 days to make a profit, for example. This negotiation does not always work and requires a good relationship with the vendor and decent negation skills. It can, however, be an excellent way to take some of the financial pressure off when producing products to sell.
6. Purchase Order Financing
A wide variety of factors can affect the ability of a business to produce and sell its products. These can range from seasonal fluctuations to simple supply and demand. If your market is affected by these changes, you may be able to take advantage of Purchase order financing. Purchase order financing is issued by organizations that will extend an advance to companies so they can purchase the supplies they need today to build their products. The financing organization will then collect their repayment once the products have been made and sold.
If your company deals in services rather than goods, you may not be the right candidate for purchase order financing. Purchase order financing is generally best for companies who make products and sell them with a 20 percent or more significant profit margin.
Microloans are an option for those who are founding a non-profit organization rather than a for-profit startup. Not all startups seek to make a profit. Some desire to impact change in the world through charitable or philanthropic efforts or other non-profit services. If your organization falls into this category, microloans could be for you.
Microloans can also be an option for for-profit organizations in third world countries or developing nations, where institutional lenders are few and far between. Microloans allow individuals to invest in small-scale economic opportunities. Microloans are often granted to organizations that would not otherwise qualify for a traditional loan from a bank or other financial institution.
Starting a new business is always a challenge, but with the right funding sources, you can be off to a great start.