Choose the Best Fundraising Option for Your New Business

This time of year usually gives us a shot of motivation to take control of our lives. If you’ve decided that now’s the time to step out from under your salaried job to make your business a full-time endeavor, or that it’s time to take your business from neighborhood to city-wide, you might be exploring sources of funding to help you take the leap.

Some good things to remember are:

• You don’t have to get all of your funding in one place.
• Writing applications is rarely a waste of time. You’ll always learn from them.
• Don’t lose sight of who you are doing this for. Providing outstanding value for your target customer is appealing to any funder.
• You’ll need to tell a carefully crafted story about why you–not just your business or idea–are a good bet.
• Consider the terms of any offer of funding carefully. Just because you’re eager to progress, doesn’t mean this is the right opportunity.

There are lots of funding opportunities available to you depending on the stage you’re in and the terms you’re willing to accept.

Government-Backed Loan

Best for: Businesses who already have some traction but need working capital or to purchase fixed assets
You’ll need: Provable sources of income, around two years in business, all of your financial ducks in a row, time and patience

Small Business Administration works with lenders to provide loans to small businesses. The SBA sets guidelines for the loans and partners with lenders, community development organizations, and micro-lending institutions to fulfil them. These loans generally have better rates and fees than personal loans, and some come with counseling and education. Some programs set restrictions on how you can use the funds, though, and you need to have invested your own equity in the business first, and have exhausted other lending options.

Friends and Family Round

Best for: A startup with close to zero revenue or social proof but has a long-term vision.
You’ll need: A trusted cohort of family and friends, a track record of reliability, to be able to tell your brand story simply and emotively, the ability to have frank and realistic discussions about money with loved-ones (a skill!)

A friends and family round helps you to operate while you work on prototyping or on your minimum viable product. It’s an investment in you and your capability from the people who know you best that can take any form; loan, gift, or equity investment. Be really transparent with potential lenders about the terms of your funding and how long it’ll take for them to receive their money back. Also, make sure to get your agreement in writing. Even if it seems futile to put admin between you and your parents or childhood friend, any lender you go to in the future will want to see that you keep records and took it seriously.

Crowdfunding

Best for: Pre-launch businesses that either offer a hyper-local service to an interested community or a unique product that’s sufficiently differentiated to what’s on the market
You’ll need: A strong online presence and interest in your product or business

Crowdfunding is raising small amounts of money from a large number of people, often in exchange for a voucher or reward. It’s a way of making a lasting connection and fostering continuing loyalty from people who you take along for the ride. Most crowdfunding is done through an online campaign on a platform like Kickstarter, Indiegogo, or LendingClub. Be prepared and build a solid email list and social following for two to three months before you start your campaign. It’s an exciting route that can help you build momentum, but it’s very work-intensive, and a failed campaign has the potential to put people off.

Start-Up Venture Capital

Best for: Startups with strong proof of concept and an ambitious trajectory or small businesses poised for a big expansion
You’ll need: A killer pitch, contacts, a good idea of your company valuation, market research

Venture capital is equity that comes from investment banks, venture capital firms, or single private investors. The process is long and competitive. It can take a year or more from making an introduction to receiving funding. Money is often offered in exchange for equity in the business, which means that that the lender wants your company to succeed and often has the network and business experience to elevate your business.

Personal Debt

Best for: A small, quick injection of cash to help maintain a stagnant business, or plus up other sources of funding to launch
You’ll need: A good credit rating, assets, a robust personal survival budget, lots of confidence in your business short term

You probably won’t be anticipating starting a whole new business on a credit card (🤞), but most entrepreneurs have gone into some amount of personal debt to get their business to the next stage in their plan. If you’re careful, you can leverage rewards points to support your business, and also enjoy the freedoms of keeping the equity of your business, but you risk miring your finances with high interest rates of bank loans and credit cards. You also tie your business credit score to your personal credit score, which puts your personal financial future in jeopardy. Plenty of people also borrow against their homes which gives them access to more money than a traditional credit card or bank loan but comes with obvious risk.

Bootstrapping

Best for: Early-stage companies that don’t require a large output to start making sales
You’ll need: Energy, sales or personal income

If your product doesn’t require any large equipment or research investment upfront, then you may be able to leverage sales or use personal savings to grow organically. It’s certainly a tougher road, but you won’t be indebted to anyone, so you don’t need to worry about terms, interest, or giving away equity. Few entrepreneurs start out this way, but the ones succeed have a laser-focus on sales and profits.

Grants

Best for: Small post-launch businesses at any stage
You’ll need: A stand-out brand purpose, some momentum

A business grant is money given to businesses by the government, philanthropists, or other companies that don’t require repayment or equity in your company. It requires research to find grants to apply for because the funding body is usually looking to support a niche, underserved business in a very specific area or industry. You might also be able to access grants aimed at founders with your social identity, too—there are grant bodies for Black entrepreneurs, people of color, people who are LGBTQ+, and people with disabilities. It’s certainly worth putting in the time as you learn to refine your brand story through application processes, and winning is a PR opportunity.

Accelerators/Incubators

Best for: People who have created a great, well-loved product but need more business experience
You’ll need: A highly-competitive product and brand story, sales and social proof, some solvable challenges

Accelerators offer start-up cohorts intensive and time-limited business support, which includes mentorship, networking, and funding. Typically between 5 – 7% of applicants are chosen for each program. The idea is that it tees you up for larger funding rounds in the future, with access to angel investors and exposure. However, a lot of accelerator programs require equity in your business in exchange for funding, which might not seem like a lot when you’re first starting out, but can add up once you hit your stride.