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13 ways to get funding to start your own business.

funding to start your own business

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Having good financial knowledge is crutial in deciding whether to get funding to start your own business or not. It is always often very important to check and check and check again if funding is necessary. Yes, that wasn’t repetition, it is that serious. Not taking the right measures can endanger your financial future in more ways than you can imagine. For example; getting funding too early could probably help you make the wrong decisions. If you don’t get the venture to be successful, you will then hurt your credit score and also your financial reputation. This may hinder you from getting funding when you ACTAULLY need it the most.

When starting a business, it’s important to test things first. According to my experience, things may not always turn out the way you have planned or thought they would. Usually many entrepreneurs have an idea which they tend to benchmark against that of others that have been in business. Things will always look easy this way! You will however not know the nooks and crannies of the business. It will always look like;

“Rent a big store, buy inventory and fill it up, people will definitely buy the product after all they like it. It is a popular product.” – it’s not always just this straight forward. Homework has to be done.

Questions you may ask yourself before choosing funding to start your own business.

  • How much do I actually need?
  • How much will the loan cost me?
  • Is this the best type of loan I should take out at this time? Consider the terms of the loan.
  • How long will it take me to make my first dollar?
  • Are you able to face failure and learn from it?
  • Do I have a back-up plan?

 

There are 3 major types of business financing;

  1. Non-traditional Financing.

This includes creative options like;

  • Family and friends.
  • Crowd funding
  • Self-financing.
  • Grants for small businesses.
  • And others as we will see later in this post.
  1. Debt Financing.

This is one of the traditional ways in which most businesses are funded. This option involves borrowing money to be paid back plus interest incurred over a set period of time. Debt financing lets you take full control of your business without having to share the profits.

The down side is that you take full responsibility of the risk in the event that your venture doesn’t work out.

It is also not easy to obtain as you will need collateral or have reasonable credit scores.

The collateral will be repossessed in the event that you are unable to pay back the money.

Debt Financing includes;

  • SBA loans.
  • Short term loans.
  • Equipment financing.
  • Business line of credit.
  • Personal loans.

Related article:

Pros and cons of Debt Financing.

  1. Equity Financing.

This option involves working with an investor to get your business off the ground in exchange for ownership or part of your business.

This includes options like;

  • Angel investors.
  • Venture capital investors.
  • Incubators or accelerators.

Related article:

Pros and cons of Equity Financing for your business.

Lets now dive deeper….

 

13 ways to get funding to start your own business.

Non-traditional Financing options.

 

  1. Save some money (self-financing).

This is my first option when it comes to getting funding to start your own business. The moment you think of starting a business,  first thing that should come to your mind is saving money. The other options are secondary especially if this is your first business and are working on a tight wallet. This is because the presence of money can block your creative potentials especially when you are starting out. Daymond John emphasizes how a tight wallet can help you become more creative. (Tapping into the power of broke). You can get the book The power of broke by Daymond John here.

Also, if you are very serious about what you are doing and have done good research, you can self-finance your venture through these other options;

  • Selling off your assets.
  • Borrowing against your home.
  • Using your retirement savings.
  1. Friends and family.

This can be very helpful if your credit history isn’t good enough to get you a bank loan. Family and friends are most likely going to understand your explanation past credit reports. This will however work if you have a good reputation. Your image is everything when it comes to business because the people you meet today are the ones that will recommend you tomorrow. Therefore if you have acted responsible in the past and have valued your relationships, then you will not run out of options when the bank turns you down on loans.

Regardless of how you decide to structure the funding, though, do take care to put the terms of the agreement in writing just as you would with a formal lender or investor. Make sure everyone involved has clarity and documentation of what was agreed at the start. That’s critical for protecting your personal relationship in the event that your business endeavors don’t go exactly as planned.

  1. Get a business partner.

Getting a business partner can be one of the ways to get funding to start your own business. You could agree on a percentage each of you is to come up with. This however could have its own challenges. Many of them could arise from misunderstandings in decision making, finances, and many other areas.

  1. Crowd funding.

This is another non-traditional means of financing. Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. You can read more about crowd funding from Wikipedia. Today we have platforms like Kick starters, indiegogo, rockethub, go fund me, crowdrise, sella band, crowd funder and many others. Please be aware that some of these have restrictions according to location. For some, you will need to have an address in the united states.

  1. Grants for small businesses.

Grants are non-repayable funds usually given by the government, corporation, fund or trust to a recipient to support a project. There is a way to apply for grants and in some cases you will need to comply with some rules and regulations.

 

Debt financing options.

  1. Equipment financing.

If you need to buy items such as a vehicle, computers or kitchen appliances for your business, then equipment financing is agreat option for you. In this case you don’t need to worry about collateral as the equipment you are purchasing will serve the purpose.

  • They are easier to access.
  • Less paperwork is needed.
  • No need for personal commitment in terms of collateral.
  1. Business line of credit.

This is similar to a credit card. They are usually offered by banks. The bank usually sets up a specified maximum credit line from which you can get funds when you need them. The advantage is that you only pay interest for what you use, however , the rates of interest are normally higher.

  1. Personal loans.

These can be another way for you to get funding for your business. However, just like the name states ‘personal’, you will bear the risk to your name in case the business doesn’t work. The rates are sometimes lower than those on business loans.

  • Decent credit history is needed.
  • Collateral might be needed.
  • You may need a guarantor in case you have a bad credit history.
  1. Short term loans.

These are great if you have a poor credit history. They are normally easier to acquire however, the frequency of re-payments may not favor some businesses especially start-ups. For example, some are paid weekly which could come up as rather stressful  and unreasonable when you are trying to get things to work out.

  1. SBA loans.

SBA is Small business Administration. They are part guaranteed by the government and can be used for anything from working capital to equipment purchase. The downside is that they take longer to process and require a bit more paperwork. Also, consider the fact that you might need collateral or a good credit history.

 

Equity financing options.

 

  1. Angel investors.

These are wealthy individuals with probably several businesses. You basically have to explain your idea well enough to them and if they are inspired and see a bright future, then will invest in your business. However, as a form of equity funding, They will invest in exchange for ownership in the business.

  1. Venture capital investors.

This may probably not be the best starting place for small businesses. This is because the equity for venture capital investors is usually high. Most of them deal with investments of at least $1Million.They work just like angel investors, however, they only fund large corporations.

  1. Incubators/ accelerators.

These normally help small start-ups access funds and other resources like mentorship, business space, equipment, software, and others. It’s the right start for a small business, however , you will fly under someone’s wings.

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