Last Updated on July 3, 2024 by Guest
As good as a product or service idea may be, startup founders need funding to get the business off the ground.
Startups need financial support to employ and pay staff, rent business premises, set up IT, and produce goods or develop services.
Although some startup founders will be fortunate enough to already have access to funds such as existing savings, many will have to seek external sources of funding.
Luckily, this article will explore seven types of funding to get your startup off the ground:
1. Bank Loans
One of the most prominent methods of acquiring funding for a startup is to get a bank loan. However, this is usually one of the most expensive options, and you must build up a good credit score to be accepted.
Although the bank’s application process for a loan will be reasonably straightforward for most startup founders, the maximum amount you can borrow and the interest rates will vary drastically.
2. SBA Small Business Loan
More specifically, your startup may qualify for an SBA small business loan – a loan that is backed by the Small Business Administration – of between $500 to $5 million if it meets these requirements:
- Your startup is officially registered as a for-profit business
- Your startup operates in the United States or U.S. territories
- The founder has already invested time or money in the startup
- Startup founders have already tried to secure alternative funding
The SBA is a federal government program that supports small business owners through mentorship, workshops, counseling, and small business loans.
While the program backs the loans, the money doesn’t come directly from the SBA. Instead, you’ll have to find a local lender who provides SBA loans to acquire the funding.
However, because the SBA backs these loans, they’re less risky for lenders so startup founders are more likely to be accepted.
3. Angel Investors
Angel investors are individual people with high net worths who use their resources to fund riskier startups. They are often one of the more accessible forms of early-stage capital for startups.
The most beneficial aspect of working with an angel investor is that they can choose to make an investment decision independently. They don’t have to include a partnership or corporate hierarchy in the decision-making process.
Angel investors also tend to have expertise in a particular area, often where they have made money before. This helps the startup founder in several ways, including:
- Angel investors won’t waste the startup founders’ time asking unnecessary questions because they already know the industry.
- Angel investors tend to be well-connected in particular industries and are able to offer startup founders further help and resources.
- Along with funding, angel investors offer advice, business connections, and other guidance to help launch the startup.
Angel investors do not bail people out of money problems or make charity investments because a startup founder feels their ideas are important to the world. They make investments in exchange for a healthy return.
There is no set limit on what an angel investor can give to startup, but a typical range would be from as little as $5,000 to as much as $5,000,000.
4. Venture Capital Trusts
Venture capitalists are private investors who work in a firm and often consult with other professionals on their investments. A venture capital firm is usually run by a group of partners who have raised money to invest on behalf of a group of limited partners (LPs).
Venture capital is a great funding option for startups looking to scale big because the investments are fairly large. However, venture capitalists purchase equity in startups and expect to earn exponential profits as the business grows.
The partners have seven to 10 years to invest and generate a significant return. Creating a big return in such a short amount of time means that venture capitalists must invest in startups that are likely to be successful.
Other than being likely to succeed, your startup idea must stand out because venture capital firms receive more than 1,000 proposals a year and are mostly interested in businesses that require an investment of at least $250,000.
A critical difference between angel investors and venture capitalists is that angel investors take a more active role in growing the startup.
5. Crowdfunding
Crowdfunding allows startup founders to raise capital from friends, family, customers, and individual investors through social media and online crowdfunding platforms such as GoFundMe or JustGiving.
It’s much easier for startup founders to get their ideas in front of more interested parties because crowdfunding platforms become a single space to build, showcase, and share your business ideas.
The money raised is usually released to the startup once a predefined target has been reached; if this target is not achieved, the funds will typically be returned to those who invested it.
6. Friends and Family
Startup founders sometimes have the opportunity to accept financial support from their close family or friends. This may be in the form of informal loans or grants, often without any expected return on investment.
However, you should treat a loan or grant from friends and family as a professional addition to your existing personal relationship in case of any disagreements.
We recommend you create a written contract stipulating the terms of the loan or grant and clarifying that they likely won’t get money back from their investment.
7. Credit Cards and Overdrafts
Despite being a costly method of financing a startup, many founders will rely on personal credit cards and bank overdrafts to get their business off the ground.
If you opt to use credit cards or overdrafts, you should aim to repay any outstanding amounts owed as soon as possible to avoid interest fees.
Luckily, using online banking on your smartphone allows you to see how deep you are into your overdraft and how much you have to repay on a credit card.
Consider choosing a credit card with a 0% introductory APR. This means that as long as you pay off the balance each month, you essentially get a free loan.
However, once that introductory period is over, any balance you’re carrying will likely have a hefty interest rate—commonly an APR of 20% or higher.