Startup funding, also known as startup capital, is money used by an entrepreneur to launch a new business. The funds can come from a variety of sources and can be used to hire employees, rent space, purchase inventory, or cover other startup costs.
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How do startups get funded?
Finding startup funding can be difficult, especially if you want to work with a traditional lender. Banks can be picky about who they lend to when it comes to small business loans, and they typically want to see high sales volume, cash reserves, at least a year of business history, and strong credit. Many new businesses may struggle to meet a bank's stringent lending criteria.
However, there are numerous startup business funding options available that are not provided by banks or other traditional lenders. Knowing your financing requirements and business objectives will assist you in selecting the best type of startup funding.
What exactly is startup capital?
Startup capital can take many forms, but it usually falls into one of three categories: self-funding, investors, or loans.
Self-funding: If you have sufficient personal savings, you may decide to self-fund, or bootstrap, your startup. When you fund your startup on your own, you retain complete control of your company (unlike investors) and avoid paying interest (unlike with loans). The disadvantage is that you may lose your savings if your business fails.
Angel investors and venture capital firms are interested in investing in startups with high growth potential. This type of startup funding does not require monthly payments; however, you will most likely be required to give up some ownership of your company. If they fund your business idea, some investors will want to be involved in the decision-making process, while others will prefer to remain hands-off.
Loans: Small-business loans allow you to keep full ownership of your startup, but you'll have to start repaying the loan — plus interest — right away. Most traditional lenders, such as banks, will only lend to well-established businesses with solid financials. As a startup, you may need to look elsewhere for funding, such as online lenders.
Different types of startup business funding
Here are some more specific types of startup funding within the three categories mentioned above.
1. Small Business Administration microloan
The Small Business Administration of the United States provides several loan programmes, some of which are tailored specifically to startups. The SBA microloan programme, for example, can provide up to $50,000 for working capital, inventory, supplies, furniture, fixtures, machinery, or equipment.
2. Microfinance
Microloans are also available from private and nonprofit lenders to startups that may not be eligible for a traditional business loan. These lenders typically assist minority or underserved small businesses. Microloans typically have favourable terms, and making timely payments can help you build your credit, making it easier to obtain additional financing in the future.
3. Family and friends
If more traditional lenders are unavailable, family loans may be able to help fund your startup. While these loans may have low (or no) interest rates, they can be costly if they begin to interfere with your personal relationships. Putting the terms in writing can help both parties set clear expectations and ensure that everyone understands and accepts the risks involved.
4. Individual business loans
Personal business loans are a good option for people who have good personal finances. Loan amounts are smaller and terms are shorter than traditional business loans, but most are funded within a week of approval and can have lower interest rates than other financing options depending on your credit score. Just make sure your lender does not have any restrictions on using a personal loan for business purposes.
5. Investment capital
Because there is a significant amount of risk involved, venture capitalists typically only invest in high-growth companies. If the startup fails, the investor will not see a return on their investment. Most venture capitalists want a seat on the board of directors of any company they invest in. Some people, however, will want even more control.
6. Grants for small businesses
Small-business grants can be difficult to obtain (competition is fierce), but if you do, you're looking at free money for your startup. Grants do not require repayment or interest payments in the same way that loans do. If you are a female, veteran, or minority business owner, you may have a better chance of finding a grant for your startup.
7. Crowdsourcing
Crowdfunding enables entrepreneurs to raise funds for their businesses through an online campaign. You can offer gifts to those who donate to your campaign (such as a free product) to incentivize donations, but you can also design the campaign to fit your needs and budget.
8. Credit cards
Business credit cards, when used responsibly, can provide temporary startup funding. A credit card with a 0% introductory APR can be especially useful if you need short-term financing for large purchases. Make a plan to pay off your balance before the introductory offer expires and the variable APR kicks in.
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