Starting or expanding a business often requires significant capital. Whether you’re launching a startup or growing an established company, understanding your funding options and how to secure financing is essential. Here are the top ways to fund your business and what you’ll need to prepare for a successful funding application.
Bootstrapping
Self-funding, or “bootstrapping,” uses personal savings, credit cards, or funds from family and friends. This type of funding is typically best for entrepreneurs with limited capital needs or wanting to maintain full business control. A solid budget plan and financial management plan are recommended to focus efforts and funding.
Small Business Loans
Loans from banks, credit unions, or online lenders designed specifically for small businesses are more common for companies with a strong credit history and clear revenue projections.
Financial institutions will likely require you to have:
- Detailed business plan
- Financial statements (balance sheet, income statement, cash flow statement)
- A good credit score
- Collateral (in some cases)
Business Lines of Credit (LOC)
A business line of credit is a flexible funding loan option that allows businesses to borrow up to a set limit. It is best for managing cash flow fluctuations or short-term expenses. Lenders will typically require business to “rest” or bring the LOC to zero for a specific consecutive period of time during the year. Like small business loans, businesses seeking an LOC should have a strong credit score, consistent revenue history, and financial statements.
Angel Investors
You’ve seen the hit TV show Shark Tank, where high-net-worth individuals (aka angel investors) provide capital in exchange for equity or convertible debt. Angel investors can be powerful for startups with a great idea and high growth potential. Entrepreneurs must understand their business, including the industry, marketing, competition, and financial information. For the best chance at scoring angel investor funds, have a comprehensive business plan with market analysis, financial projections, and a solid pitch deck. Be ready to present your business vision clearly and confidently.
Venture Capital
Venture capital, a type of private equity, is an institutional investment in exchange for equity in rapidly growing startups. Businesses in technology or innovative sectors with high scalability often seek this type of funding. Business savvy is expected, so ensure you have a strong management team, scalable business model, market traction and growth metrics, and a detailed business plan and financials.
Crowdfunding
There are numerous crowdfunding platforms to help entrepreneurs raise funds from a large number of people. While crowdfunding has been a successful option for many businesses, there are additional risks not associated with other funding options, including the time and effort you may need to reach your money goal, fees and costs charged by the platforms, idea theft, legal issues, and complex tax implications. Businesses that take this route are primarily consumer-focused products. Ensure you have a compelling story, engaging message, clear financial goals, and a solid business and marketing plan.
Grants and Competitions
While accessible with effort, grants and competitions can be challenging to find and win. You’ll need to invest some time regularly checking government websites, industry associations, and business support organizations, among other sources. Be aware that you may need to work grant/competition timing and availability into your timeline and planning. However, non-repayable funds awarded by governments, corporations, or organizations can work for innovative projects or social enterprises. Have your business plan and proof of concept or prototype ready for the grant proposal or application.
Regardless of how you choose to help fund your venture, key items you should have are:
- Comprehensive Financial Statements: Ensure your balance sheets, income statements, and cash flow statements are accurate and up-to-date.
- A Strong Business Plan: Outline your mission, market analysis, product or service, competitive advantage, financial projections, and growth strategy.
- A Solid Credit Profile: Maintain a strong credit score by making timely payments and reducing debt.
Need help?
Many communities have economic development and business incubator-type organizations with resources and professionals to consult with. You can also look to legal, financial, and other business advisors to help with complicated issues. Your CPA can help with your financial statements, business plan, and review your venture from a holistic financial perspective, including tax mitigation strategy.
