When starting a new business, it is easy to think that there is only one route to take for funding, and one of the most traditional things to do is get a bank loan. However, this can be a scary leap to take, especially in an era of burdensome school and home loan debt. Other options do exist; you may just need to get a bit creative.
The current power of social media means that crowdfunding campaigns have become a popular way to not only fund businesses, but any number of financial endeavors. There are many websites that are completely dedicated to crowdfunding, such as Kickstarter, Fundly, and Indiegogo, which allow friends, family, or other supporters to pledge money for businesses, projects, or charities. Because so many of these sites are available, the special features of each site can vary greatly. Therefore, it is important to research beforehand to decide which site format and features will be best for your crowdfunding campaign.
2. Angel Investors
Angel investors are wealthy people who choose to invest in a startup business, often in return for a share in the company, but not always. Angel investors can be difficult enough to procure in the first place, let alone one who is a completely altruistic benefactor.
For the entrepreneur who is fortunate enough to attract an angel investor, it is important to ensure that they are a good fit for the business plan. It may be difficult to refuse funding, but an investor who is overbearing or has differing opinions on the company’s direction can cause more damage than their money is worth.
3. Friends and Family
As in the case of any financial issues or ventures, turning to friends or family may be an option. However, if this is an available option, keep in mind that this could affect your relationship. Your close friends and family may resent you for asking for the favor, or you may feel indebted to them.
Additionally, be mindful of how much, if at all, they are reasonably capable of helping you. If you do choose to go this route, the best chance for success is to ensure that everyone involved is treating the situation professionally, as a normal business owner and investor would.
4. Venture Capitalists
Venture capitalists are similar to angel investors; however, the capital they use to invest and their strategies often differ significantly. While angel investors are individuals who use their own money to invest in a business, venture capitalists are individuals or groups who commonly contribute funding to small businesses, using a pool of resources.
Because venture capitalists are pulling these funds from multiple, lucrative sources, and because they make a business out of investing in other businesses, they also may invest greater sums of money than angel investors do. Furthermore, angel investors are more likely to invest in a business that is just starting out; venture capitalists may invest in a new business, but it may take more effort to convince them that their investment will be well-placed.
On the other hand, like angel investors, venture capitalists will expect a share of profits, and perhaps even a voice in the company’s direction. Even more so than in the case of angel investors, it is important to be wary of accepting investments from venture capitalists, due to their often strictly profit-oriented mindset.
5. Annuity or Settlement Payments
There are some situations, such as in the case of inheritance, court settlements, or lottery winnings, where the receiving party can choose whether they would prefer to accept the money in installments or as a lump sum. It is common wisdom that it is often more beneficial to take payments in installments rather than a lump sum, because you will make more money overall due to taxes.
However, if a short-term windfall will do more to invigorate your startup early on, the lump sum could actually be more valuable than installments as a result of a higher rate of return. In fact, even if you have already chosen to receive payments, you can sell those annuity or settlement payments in exchange for a lump sum. However, it is still important to take into account the pros and cons of selling settlement or annuity payments.
Overall, starting a business will almost always be a risky endeavor. On top of that, success will, to some degree, depend on luck; including whether or not you can find willing investors. The best way to stack the odds in your favor is to plan carefully and create a solid business plan. This will not only minimize risk in the realm of business operations, but can also improve your odds with early pitches to prospective investors and loan officers.