Starting your business needs commitment, hard work, and finance. If you have a smart small business plan but no money to execute the plan, your idea is practically of no use. Getting an adequate amount of business startup financing from a legal source is one of the most important steps to ensure your startup plan’s smooth running.
If you are struggling to get funds for your startup plan, you are not alone in this race. This article is for you. We have compiled a guideline about the most popular investment plans available in the market for business startup financing to ease you out.
Table of Contents
1. Angel Investment
Angel investment is a funding category specifically good for business startups. In this category, investor contracts to fund your business in exchange for equity. The amount of money the investor invests varies from $15,000 to $150,000. It can exceed this limit base on the business type and investor’s financial capability.
Apart from getting funding for your business, you can benefit from your investor’s experience, i.e., angel. In return, you have to give up some equity that means losing some control of your business. You will have to make them a part of your business activities.
2. Reward-Based Crowd Funding
Reward-based crowdfunding is another financing technique that involves multiple funders at a time to fund your business startup. It is usually done with the help of professional crowdfunding websites.
Crowdfunding is an attractive funding procedure for startup businesses because it doesn’t involve any equity or control sharing. It is based on reward, and that’s it. People who fund your business tend to get any bonus in return. It can be your products or discounts on the products you made.
Crowdfunding also helps entrepreneurs to advertise their business through their websites. All you have to do is make your profile on the crowdfunding website and explain a compelling story about your business initiative and the difference your products will bring to people’s lives.
3. Equity Crowd Funding
On the other hand, equity crowdfunding is another funding scenario where you have to sell some of your stocks or shares to get funding for your business. Equity crowdfunding may be higher than reward-based crowdfunding, but entrepreneurs don’t find it attractive to lose their power over business decisions. It is more complicated than simple crowdfunding and requires legal procedures and documentation.
4. Debt-Based Crowd Funding
The fourth category of financing a small business setup is debt-based crow funding. It is by far the oldest method of financing. Debt-based crowdfunding is also known as peer-to-peer lending, which means people lend you money to run your business, which you have to give back with interest (money charged as a fee to lend money).
Irrespective of the business type or size, you can get debt-based funding for your setup. But it comes with tough conditions. The interest rate you have to pay is higher than the bank rate. Besides, you will have no access to business knowledge because the lenders specifically don’t belong to your professional line.
5. Venture Capital
Startup business financing is not limited to crowd-funding only. Venture capital firms also provide funds to business start-ups based on some terms and conditions.
Venture capital firms provide capital, business assistance and help advertise the business, introducing potential customers, partners, and employees. This can be the best way to finance the business, along with getting basic insights about your business. But it is not easily accessible.
Venture capital firms are selective to partner themselves with and limited to some industries only. Size, growth potential, customer feedback, and work ethic all of these factors collectively combine to make a business startup fulfill venture capital firms’ criteria. They want to invest in the businesses about whom they are almost sure that it will do big in the future.
6. Small Business Grants
The governments give business grants to promote business activities in the country. You receive grants in the form of funds, capital, or cash. The government does not provide grants for an unspecified period. They are usually project-based, or a specific sum of money is given that a businessman has to invest wisely to run his business.
Usually, government grants are limited to some sectors that the government wants to promote in the country and are supposed to be in the nation’s interest. It includes the energy sector, conservation, and community, social, or NFP sectors.
The value of a grant is different based on the size and type of project. Once you get a grant, you don’t have to pay it back. But, government procedures and processes take a long time, and it follows a tough selection criterion.
7. Small Business Loans
A small business loan is the most common and popular funding way to finance small business startups. Commercial banks grant business loans at a specific interest rate. Banks can’t risk their money, so they make sure you will pay back the money you have borrowed.
It involves a long application process, and banks usually keep themselves safe by signing significant collateral. If a person fails to pay back the money, they reserve the legal right to confiscate the property they have signed in collateral. It can be a house, land, car, or any precious thing owned by the person.
The positive aspect of getting small business loans is that you don’t have to give up any equity and the interest rate is lower than the market rate.
Make the Right Choice
The seven ways mentioned above of financing the business startup have their pros and cons. One shoe doesn’t fit all. There is not one category of business funding that suits every industry. You have to choose what is best for your small business resilience.
Small business loans are undoubtedly the most popular way to finance the business, but they may not suit you well. That’s why considering your circumstances and the nature of the business, you have to wisely select which option is best for you to finance your startup.