Ways to Get Funding for Your Business Idea
Having a big, billion-dollar idea for a new company or start-up is great—but now what? You probably need a website, a tech team, some office space, and, of course, at least enough cash coming in each month to pay your rent.
Which means, you need money. Whether it’s a cool new app or a swanky café, most businesses and most entrepreneurs require at least a little bit of funding to really get off the ground in their early days.
As an executive member of BizFilings, I’m often asked by entrepreneurs for help finding funding. The good news is, there are quite a few places to get it (and many that are frequently overlooked). Read on for a first-time founder’s guide to where to look for funding, and which type might be right for you.
Begin With Bootstrapping
When first getting started, many entrepreneurs use “bootstrapping,” which means financing your company by scraping together any personal funds you can find. This typically includes your savings account, credit cards, and any home equity lines you may have.
In many cases, using the money you have instead of borrowing or raising is a great approach—in fact, some entrepreneurs continue to bootstrap until their business is profitable. This can be beneficial because it means you won’t have extensive loans and monthly payments that bog you down, especially if you run into snags along the way.
But, if you’re looking to scale your business quickly, it can be advantageous to bring in outside sources of funding. So, what happens when your funds run out, or you decide you need something more? That will ultimately depend on the type of business you’re building, but there are some common places to start.
Consider Friends and Family
Asking your friends and family for money might seem like a daunting prospect—but tapping those closest to you is often a good first step before getting external funding. And hey, it can never hurt to ask. While Aunt Irene is probably not in a position to finance your entire new social network for dog owners, she may be impressed enough to toss you a couple grand to help you get rolling (and join the site to find Fido some new playmates).
Before you ask your friends and family for money, though, you should have a business plan at the ready. This way, you can explain to them exactly what you’re selling, what you plan on charging, how you’ll make money, and whether you’re asking for a loan, an investment, or a gift (i.e., whether or not they should expect to get back any money they put into your business, and if so, how much).
Explore Alternative Funding Sources
If you’re looking for a relatively small amount of money (anywhere from $25 to $5,000), there are quite a few micro-loan organizations that lend to start-ups and entrepreneurs, such as Kiva and Accion. These websites cater to low-income entrepreneurs in the U.S. or those working for social good (and some only provide micro-loans to those living below the poverty line). But if you think you might qualify, check out their websites for more information.
Another alternative are the increasingly popular crowd-funding sites, such as Kickstarter and IndieGoGo, which provide you a platform to raise money from individual, small supporters across the web. You’ll set up a campaign and name a target amount of money you want to raise, as well as create perks for donors who pledge a certain amount of money. Then, you raise money for the campaign over a specified time period. With Kickstarter, you’ll only get to keep the money if you raise the full amount of your goal, but IndieGoGo will let you keep anything you raise (for a cut of the proceeds). For more info, check out our guide to choosing between the two and maximizing your crowd-funding campaign.
Next: If You’re Running a Small Business
If you’re launching a small company (vs. a tech start-up that you see as the next Facebook), you’ll definitely want to check out your local small business development center. Many universities have one, and the Small Business Administration (SBA) alone has 63 across the country. Not only can these centers help connect you with groups of entrepreneurs for networking and angel investors for funding, they can help you determine what type of loans and funding you might qualify for and help you apply. Your local chamber of commerce may also be a treasure trove of information and guidance in terms of where to get local funding. Many large cities have programs and organizations that exist solely to bring business into the local community.
Consider Taking Out Loans
If you can show that you’ve started gaining traction and making money (and that a loan would help you earn even more), you may be able to qualify for a traditional bank loan. Many banks, such as Bank of America and Wells Fargo, have recently announced increased commitment to small business. While each bank and individual situation differs, this may be a good bet if you’re looking to find funding between $5,000 and $500,000.
Next: If You’re Launching a Tech Start-up
Look to Angels
If you have a tech start-up, you’ll probably eventually need more capital to really get going—to hire people or get office space, for example—than bootstrapping and crowd-funding will afford you. You’ll likely need to reach out to outside investors. A good place to start is angel investors, usually established business professionals with high net worths who are looking to invest in promising companies. Typically, an angel will invest anywhere from $10,000 to a few million dollars.
To find angels, ask other entrepreneurs in your network, or check out the Angel Capital Association, which counts over 330 angel investor groups nationwide. You can also look at AngelList, a website that helps entrepreneurs make connections with interested investors. So far, the site has helped more than 1,000 start-ups get funded.
In addition to making direct loans, angel investing groups sometimes host events or competitions that can help provide new entrepreneurs with additional networking opportunities. Check your local community for these groups.
Venturing into Bigger Capital
If you’re looking for some serious funding (at least $1 million), you’ll need to turn to venture capital. Venture capitalists (VCs) are more likely to require an in-depth and airtight business plan, but they can also give you larger amounts of money.
VCs typically invest in a few different companies for their clients, and hope to make money off of one (or all) of them to pay back their client’s investments. What that means for you is that they see all kinds of businesses—and you have to make yours stand out. Also, you should know that VCs are looking for a return anywhere from 3-10 times their original investment, usually within the next 5-7 years, so it’s best to have an exit strategy in mind.
The best way to get meetings with VCs is through introductions from other entrepreneurs or investors—which means that if you’ve decided to solicit VC money, it’s time to leverage your contacts (and their networks) to see who you can talk to. Don’t have any contacts? It’s more of a gamble, but you can also browse the National Venture Capital Association website and pitch your business to the ones you find a connection with. While cold-calling a venture capitalist may not be the easiest feat, it’s somewhere to start.
Ready to Launch
Finding funding can be the hardest part of getting your business off the ground, but also the most rewarding. Once you’ve saved, gotten approved for a loan, or found other people to invest in your business, you can get back to—or start—your dream job! Though it can be a long road to success, finding allies along the way (whether they’re friends, angel investors, or venture capitalists) to help keep your business afloat can make all the difference in the world. Good luck!
Photo courtesy of RikkisRefugeOther.
About The Author
Karen Kobelski has been the general manager of BizFilings, an online incorporation service, since 2007. She has more than 20 years of experience leading professional services teams and has spent the past 7 years leading incorporation and registered agent organizations. A mom of twin three-year-old girls, Karen knows how important incorporation is for mompreneurs to protect their assets and to gain credibility and tax breaks. Featured on The Daily Buzz, Inside Business, Bloomberg Radio and Lifetime’s The Balancing Act, Karen has recommended the benefits of incorporation to thousands of entrepreneurs.