Have you ever had the thought for a new product or technology but had no clue how to get your idea off the ground? Having a fantastic business idea is worthless without the capital to make it happen. What can make it even worse, though, is if, years after having the original idea, you see that someone else has gone to market with the same concept and became wildly successful.
For those with tech-based ideas, you will likely have more success with an angel investor or venture capitalists (VC) than a startup with more of a physical product offering. For those that can’t get the attention of angel investors or VCs, here are eight ways to fund your business with startup capital.
(For a detailed primer on how to get your startup going, click here.)
1. Friends and Family
One of the first places most will tell you to go when trying to fund your startup is to ask friends and family. This can be one of the best sources to get initial seed money, but it can also backfire on you if your idea is not rock solid. Regardless of whether your friends and family choose to invest with you, though, these are the people that know you the best and can be a valuable sounding board for how good your idea is and where it could be improved.
One of the most significant advantages of getting startup capital from friends and family is that, unlike the bank, they are unlikely to ask for interest on their loan. And if you are fortunate, you may receive startup capital as a gift that they do not expect to be repaid.
2. Small Business Loans
A small business loan is always a useful startup option for a variety of reasons. You retain full ownership of the company, you get your money quicker, and all it takes to apply is filling out a form. The terms of the loan are clear, and there are tax benefits on top of everything else. The downside is that lenders are not partners, so you will not be cut any slack, and repayment will be on specific terms.
Not every bank offers small business loans, and while the federal government offers SBA (Small Business Administration) loans, which guarantees 85% repayment to the banks, a limited number of these loans are available.
3. Small Business Grants
The same Small Business Administration program run by the government will sometimes offer grants to small businesses that are run by minorities, women, or veterans. If you fall into one of these categories, seek out the SBA or your local chamber of commerce to see if a grant could be available. Another option is to look at Grants.gov, which includes over 1,000 different federal grant programs you can search through.
Bootstrapping is a term for funding the startup yourself. There are many different ways you can go about doing this. The money could come from taking equity out of your home, a low-interest credit card, personal savings, or selling personal items. The money could also come from cashing in retirement accounts or taking on a side gig. While this may not be the most attractive option, over 90% of startups are self-funded.
If you have a great idea but do not have a business model, an incubator is an ideal option. Incubators take businesses in the early stages and help build them into functioning companies. An incubator is not worried about making your business profitable right from the start. Rather, incubators are concerned with ensuring the longevity of your business and creating a sustainable system of getting your product to the market while making a consistent profit.
An incubator offers a collaborative environment to mentor your startup and provides you with a place to share ideas and access resources and feedback. However, the one drawback of an incubator is that they do not provide you with actual seed capital for your business. The mentorship they provide, however, can be worth considerably more than a lump sum of money.
An accelerator is similar to an incubator, and the two terms are often misconstrued. But before applying to join an accelerator, your company needs to be in the right place. In contrast to incubators, accelerators are looking for companies that can make a profit right away. Accelerators also prefer to work with an existing team rather than one individual company founder. You will have to have a pitch ready, which should include a video presentation and a detailed business plan.
Accelerators typically work with companies for three to four months to build up the business using their network of connections. When the program is finished, you will have the opportunity to pitch your business to investors.
Signed into law by President Obama in 2012, the Jumpstart Our Business Startup Act (JOBS Act) was enacted to ease regulations on securities. Title III of the Act, known as the Crowdfund Act, made it legal for websites such as Kickstarter to exist. Crowdfunding involves taking loans, pre-orders, gifted contributions, or investments by multiple people at once.
Two of the major benefits of crowdfunding are that you can gauge interest and potential demand in your product, while also raising awareness and marketing for your company. But crowdfunding will not come easily unless you have a compelling idea and business plan in place.
8. Local Contests
While it would be amazing to get your idea onto a program like Shark Tank, that isn’t an option for the vast majority of startups. But many local programs have been inspired by this type of contest and hold similar competitions. Even if you do not ultimately win, entering into one of these contests could give you free marketing and let you gauge the level of interest in your product.
Bonus: Keep Your Day Job
This last idea is not one people like to see, but it can often be the most prudent. This is not to suggest that you give up on your idea or dream, but instead to slow-play your startup and not rush into it. We can call this long-game bootstrapping. If you have a job that pays you enough to live a comfortable life and pays all of your expenses, you can take your time in developing your idea, business plan, and startup capital.