Think you’ve come up with a good idea for a business? Congratulations! A good idea gets you to the starting gate. But, that’s only half the battle—now you’re going to need money to get into the race. That’s where startup financing comes in: it’s the means to turn your good idea into a real business.
Thankfully, entrepreneurs have more sources of startup funding than ever before, which is good news for your future business. So whether you’re looking into traditional financing sources from banks and investors, or new twists on startup funding with innovative crowdfunding and angel investors, having options can put you into the driver’s seat and in control of your destiny.
Major Sources of Startup Funding
Overall, most funding for startups falls into one of the four following categories:
- Revenue. This is probably the most common method. You sell your product or service, receive money for it, and plow that money back into the business to fund growth. It’s also called bootstrapping, self-funding, and internal financing.
- Equity. This is selling shares in your new venture in exchange for money, services of value to the new business, or work done for your venture (also called sweat equity).
- Debt. Loans fund many startups. They can come from banks, friends, family, and private investors.
- Grants. This is money that is given to help a business get going, but requires no equity or repayment of the money. Not-for-profit companies receive most grant money, but for-profit entities are often eligible as well.
Specific Types of Funding
Here is a quick overview of the most common types of funding methods for startup companies.
Crowdfunding. Kickstarter and Indiegogo, among others, have provided robust, innovative ways for startups to raise money. In a crowdfunding campaign, the entrepreneur takes his case directly to the public.
Angel Investing. Angel investors are people with money and an interest in investing in trendy ventures with strong growth potential. The best kind are accredited investors, with a net worth of at least $1 million or an income of $200,000 or more for each of the last two years. They often seek investments as a group.
Venture Capital Investing. Venture capital firms seek out promising businesses that are looking for funding during their early stages of development. The money often comes with a formal agreement covering the timeframe for the firm to begin seeing a return on their investment.
Bootstrapping. Some aspiring entrepreneurs obtain startup funding by self-funding: selling assets, withdrawing savings, borrowing against their home, maxing out credit cards, or tapping into their 401(k) savings.
Friends and Family. Loans can often come from the people who know you best and are rooting for you to succeed.
Bartering. This is exchanging your products or services with other companies to get what you need to grow. You can barter things like office supplies, computer repair, or specific skills or expertise that’ll benefit your business.
Small Business Grants. Grants can come from the local, state or federal government as part of an effort to stimulate the economy. Some nonprofits also offer them.
Small Business Administration (SBA). The SBA extends small loans and expertise to new businesses.
Lines of Credit. Banks offer commercial lines of credit that are well suited for startups. With a line of credit, you only pay interest on the funds you use rather than the entire approved loan amount.
Incubators. These can be universities, nonprofits or companies specializing in this type of work. Incubators provide labs, consulting, office space, marketing advice and sometimes money. In exchange, they often require equity in your startup.
Partnerships. This involves finding someone who has substantial skills, friends, or money to contribute to your business in exchange for a percentage of it.
Major Customer. If your product or service is valuable to a single major customer, they might be willing to give you money for development and startup expenses. In exchange, your customer will have input and varying amounts of control over your production process.
Most new businesses use a mix of sources for startup financing. Whatever route you choose, funding can give you an excellent opportunity to turn your idea into a thriving company.
Looking for the means to turn your good idea into a real business? Talk to one of our lending professionals at Liberty Bank.