By Tian DuBelko
We get it. You’ve been hard at work building a business and bringing a product to market. Now you want to ramp your operation to the next level. And to do that, you’re going to need funding. For founders, getting funded can be a daunting and intimidating experience. However, there are many places to look for capital, and in this article, we’ll look at some of the options that founders can turn to when they’re in need of funding.
Loans
A common option that founders turn to for funding is loans. Typically, there are two kinds of loans to consider:
1. Friends and family:
Usually, you’d want to keep business and family separate, but it can be a great idea borrowing from family members or friends who have the resources to help your business grow. Working with someone who you know can be a timesaver as you can bypass some of the paperwork that comes with a formal loan.
Benefits:
You’ll likely be working with someone who you have built up trust with over the years since its a close family member or a friend. This should make easier to stay on the same page and maintain a consistent dialogue. Also, since you’re working with someone you trust, there should be less paperwork and legal review, which will speed up the loaning process.
Risks:
Unless they have prior experience in business, your family and friends probably can’t offer you any real advice or mentorship in entrepreneurship. This means that you might have to look elsewhere for advice. Also, being involved in business with people close to you can put your relationship at risk. Money is often a sore subject for relationships, so think about any potential fallout before you borrow from family or friends.
2. Small business loan:
Most founders are also small business owners, and a small business loan could provide you with the funding you need in one fell swoop. Most cities have a Small Business Association (SBA) that can connect you with a loan. This loan comes at a fixed interest rate.
Benefits:
If you’re dealing with a bank or an SBA, you will get your funds with very clear conditions of interest rates and payment requirements. This can be helpful in planning your budget and spends. Also, just about all banks have general business resources that can help you with finding information, networking, and getting mentorship. You’ll have more freedom in your day-to-day decisions as well since SBAs and banks are less interested in micromanaging and more interested in getting a return on their investment.
Risks:
One downside of dealing with legitimate financial institutions is the amount of paperwork required. Not only that, you will need to provide some proof that your business can be profitable. Banks dislike taking major risks on investments, so be prepared to show a history of your sales and success if you want their funding. Given that they’re risk averse, banks will be more conservative with their funding, and you’ll need to show that every dollar will be put to good use. If you can’t demonstrate a clear business and fund allocation plan, don’t be surprised if your stream of capital dries up.
Angel Investors
Angel investors, also simply known as angels, are privately wealthy individuals who are passionate about funding worldly causes that will provide a return on their investment. Most of the time, an angel will provide capital to a startup in return for a percentage of equity in the company.
Benefits:
Angels can be an invaluable part of your team because of their business connections and their experience. This is especially true if they have firsthand experience in the field or market you’re in. Angels will often be your mentor and guide in navigating the startup world since they’re financially invested in you and your success. Finally, working with angels lets you get funding without worrying about the interest of a traditional loan.
Risks:
An angel investor still comes with some strings attached, since they take part ownership in your company and will want to see a return on their investment. For those reasons you’ll want to be sure you find the right angel for you and your business. Since you’ll have to give up some control of your company, you’ll need to be comfortable giving up some of the decision-making powers, which can be uncomfortable. However, since most angels have a higher threshold for risk and failure, they also have higher standards.
Suggested: 7 Things Founders Should Know About Working With Angel Investors
Venture Capital
Venture capitalists (VC) are what people think of when words like startup and entrepreneur are involved. A VC firm is a group of professional investors looking to invest in the most profitable ideas and startups with the highest potential of making a large return on their investments.
Benefits:
If you’re in need of a lot of funding for your big idea, then venture capital could be what your business needs. VC firms are run like well-oiled machines, with the necessary connections and mentoring for entrepreneurs to take their ideas and businesses to the next level. Since VC firms usually fund products with potential for large size scaling and a profitable return, they can help you turn your big idea into a reality.
Risks:
Working with VC firms also comes risks. Since a venture capital firm is investing time and resources into your business, they will want a chunk of your business equity in exchange for their help. And similar to angel funding, you’ll have to give up some control in making business decisions and in your company. Because of how heavily VCs can be invested in your company, it’s possible they can be very involved in your business operations and decisions, especially if you haven’t demonstrated a good business track record.
Suggested: How to Attract VC Investors As a Tech Startup
Crowdfunding
Finally, there is the option of crowdfunding your startup. This option has grown popular in recent years and can be a great opportunity to directly contact your customers. This could be a great avenue to raise both money and brand awareness for your business. Also, crowdfunding can be a great way to prove the market demand for your service or product, and you can often take any crowdfunding success to angels and VCs to raise more funds.
Benefits:
Unlike the other funding models, if you’re getting crowdfunded, you can still retain creative control of your business. This includes your everyday operations as well as your long-term plans and strategy. You’ll also have a chance to reach your customers organically, so you can get their honest opinions about your product and your company. It can also be a great way to build and connect with a community that’s receptive to your brand and business. Finally, crowdfunding gives you the opportunity to validate your product before manufacturing and shipping it at scale. Having honest feedback from caring customers will allow you to improve on features and identify what is and isn’t working with your business.
Risks:
One potential downside of crowdfunding is that is is a time-consuming task. You’ll need to have your business story down to a tee, have an outreach plan, and have a great community that will help you reach your funding goals. If you choose this route of funding, you have to know that there is no guarantee when it comes to crowdfunding. Sometimes your idea just won’t be that interesting to the market. If it isn’t, then you need to be ready for some honest and possibly harsh feedback from your customers.
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