Securing funding is an integral component of starting any new venture, but no single approach will work for every entrepreneur.
Locating startup business loans through local community development financial institutions, family or venture capitalists may take time. Being deliberate with your search will ensure you locate the ideal funding solution for your business.
Friends and Family
Startup financing often entails either equity or debt funding – the former involves capital exchanged for partial ownership of the company; while debt funding includes interest payments to compensate lending organizations for taking on risk on its behalf.
Business lines of credit are another popular financing solution for startups, offering similar functionality as credit cards but with potentially lower interest rates than traditional loans.
When applying for startup financing, be prepared to submit documents such as your business plan, updated financial statements and personal credit reports. Depending on the financing option chosen, an extensive application process could take anywhere between weeks and months to complete.
Small Business Loans
Finding funding outside their network can be difficult for startup owners, leading them to turn to personal funding or small business loans as alternatives.
Small business loans vary in their eligibility requirements depending on both lender and loan type. Banks tend to set high standards when offering traditional business loans, requiring excellent credit scores, proof of revenue and possibly even personal guarantees as eligibility criteria.
Other lenders, such as online servicers, offer financing solutions tailored to a range of needs with more flexible qualification criteria. Lendio provides entrepreneurs with a marketplace where they can quickly compare loan offers. Startups may also access lines of credit such as business credit cards.
Angel investors are private individuals who invest in startups for a return, often in exchange for ownership shares. Angels may also pool their investments together through angel syndicates to reduce risk and protect themselves against loss.
Angel investors typically favor working with startups in their industry of expertise.
When meeting with potential investors, it is best to present an elevator pitch outlining your business and its market opportunity. Do not send over an unwieldy 20-megabyte PDF presentation that may never get through their email filter.
Venture capitalists seek entrepreneurs with a sound business plan, excellent credit and substantial down payments to secure venture funding. Furthermore, it must be realistic about their startup’s chances of making money since debt financing must be paid back with interest.
As opposed to debt financing, equity funding doesn’t need to be repaid; however, investors take on significant risk in exchange for partial ownership of the company. To offset this risk, venture capitalists tend to focus their investments in seed round or early growth stage companies and tend to avoid those at later growth stages where competitive shakeout can devastate market values.
Business Term Loans
Business term loans are one of the most sought-after financing solutions for small businesses. Available through banks, credit unions or online lenders, these loans often come with flexible loan terms, low interest rates and fixed monthly payments – an attractive package indeed!
Startups may seek term loans for various purposes, including investing in growth initiatives or covering operating expenses. Each lender’s application processes may differ and require different documents and documentation.
Funding Circle uses criteria such as personal and business credit history, annual revenue, management experience and length of business operation to assess eligibility. Lendio offers an alternative with its easy application process that requires minimal documentation.
Many online lenders provide startup business loans with minimal paperwork requirements, making comparison easier than ever for your new venture. As you explore your options, compare rates, fees and repayment terms of each option before making your choice.
Venture capital funding may also provide startup companies with needed startup funding. Venture capital generally involves offering shares or control in your company in return for financing – giving your team a say in its operations and decisions.
Crowdfunding and local microlenders provide nontraditional startup funding options such as financing. These lenders often offer lower interest rates than traditional lenders while also providing more flexible repayment terms than these options.