Starting a business is a pricey proposition, and few individuals can afford to go it alone. So where will the money come from? The fact is, every business is different, and before you pursue funding, it’s important to consider all of the options. Small businesses have the option to apply for any of these 5 funding sources, and in many cases can even combine them. Here’s what you need to know before you apply.
Define Your Business
Before you can apply for any type of business funding, you need to have a clear sense of what type of company you’ll be operating. For example, very few businesses qualify for venture capital funding, but occasionally a small tech company will make a big splash and attract this type of investment. Those companies that do qualify are generally viewed as high-risk startups that have the potential for sizeable returns if they succeed.
This is exactly what happened to HYP3R, a marketing platform focused on geosocial data. A few years after its initial launch, the company secured $17.3 million in Series A funding, in part through an investment by Thayer Ventures and Structure Capital. In order to make it to this Series A funding round, though, HYP3R needed to go through several earlier, lower profile funding rounds, starting back in 2015. The average start-up or small business needs to set its sights lower, at least at first.
Looking At Loans
Rather than look at venture capital as a funding model for your small business, the average company should consider the many different loans available for new companies. The SBA, for example, likely offers new business startup loans with low interest rates that are ideal for small businesses seeking a funding stream and also for woman there are best business loans for women. Additionally, it can be highly beneficial to connect with the SBA because, even beyond loans, this organization has a sizeable database of resources and they can connect you to other programs that support small businesses.
The Grant Process
Another way business founders can get funding for their idea is by applying for government grants, but it’s important to understand that most grants target very specific applicant groups or types of businesses. Unlike a bank, which typically will loan money to any qualified applicant, the government makes business grants in order to foster particular economic conditions. For example, many government grants are for woman- or minority-owned businesses, a practice that aims to make up for the history of discrimination in business lending. Other government grants focus on specific types of businesses, such as those that support the arts or that are part of a rural business initiative. It’s important to do your research in order to determine if your business fits the criteria for any particular grant.
Risky Business Options
Finally, if you’re struggling to secure funding for your business, you can always pursue riskier financial avenues. For example, some individuals choose to cash in their retirement accounts in order to finance their business idea – and for some people this turns out just fine. A highly successful business can cover the tax penalties and allow you to pay back into the account, but few individuals succeed with this strategy. You should be especially cautious if you’re encouraged to use this approach, often referred to as ROBS or rollover for business startup, as a means of opening a business franchise. It can put your future in jeopardy.
Alternatively, a growing number of businesses are turning to crowdfunding to get their business off the ground; just think of the enormous success of Kickstarter and Indiegogo users who turned to these platforms to fund inventions and business ideas. Crowdfunding can be a useful strategy for investors who need to finance manufacturing, and it also benefits buyers who can purchase a new product at a discount, but it’s a limited model, and it can trap companies in a cycle in which they rely on crowdfunding for every product. In the majority of cases, though, it’s not a useful approach for traditional brick and mortar businesses
When starting a new business, it’s important to choose the right funding pathway to set yourself up for long-term success. Do your homework and consult with a financial planner. There are no guarantees in the world of small business, but you can make smarter decisions as you build your company’s foundation.