Starting a small business requires startup capital. The amount varies by industry and startup costs, but generally is enough to cover expenses until revenue reaches breakeven.
Startup funding comes from a variety of sources, including personal savings, venture capitalists and angel investors, banks and other financial institutions, crowdfunding and small-business loans. Each option has unique benefits and drawbacks.
Online Lenders
Online lenders offer a variety of startup business financing options. Most require a thorough business plan and financial projections. Some also consider the founders’ personal credit score as well as the company’s credit history.
Other types of startup funding include business credit cards, which often have 0 percent annual percentage rate offers and offer rewards programs. These can be helpful as startup companies wait to meet lender requirements, such as a minimum time in business or sufficient revenue.
Nonprofits and alternative lenders also offer specialty loans to startups, such as SBA microloans or invoice financing. The latter allows companies to improve cash flow by advancing funds against outstanding invoices. Examples of invoice financiers include BlueVine and Fundbox. Kiva offers a unique lending model that utilizes crowdsourcing for financing. Its borrowers prove their creditworthiness through what it calls “social underwriting,” which involves recruiting friends and family to kickstart the loan.
Convertible Notes
Convertible notes are debt investments that are structured like loans and offer some downside protection for investors. They typically have a maturity date after which they either convert into equity shares or the startup must repay them.
When the note holder converts into equity, they receive shares in the startup at a price based on either the valuation cap or the discount rate. The valuation cap protects the investor by limiting how much their share in the company is valued at during future funding rounds, such as a Series A round.
Investors often push to get their convertible note investment converted into preferred stock, which entitles them to receive their money back before common investors in the event of a liquidation event. Preferred shares may also come with perks such as board seats, giving the investor strategic influence in the business.
Seed Investments
Seed investments are the first sums of capital a startup raises. These are usually provided by private investors, such as business angels or even the entrepreneur’s family and friends. They typically invest in exchange for a percentage of the startup’s shares. This is a riskier form of funding than debt financing, but it can give startups the capital and connections they need to grow quickly.
Obtaining seed investment is a complex process that involves establishing a valuation, creating a pitch deck, and meeting with potential investors. This is often a time-consuming task, but it is crucial to ensure that the startup is prepared to meet investor requirements. This includes understanding the investor’s investment thesis, demonstrating market traction, and providing high-level capital deployment strategies. Lastly, ensuring that the transaction is compliant requires the help of legal and financial advisors.
Angel Investors
Angel investors are wealthy individuals who fund startups and early-stage businesses in exchange for equity. This type of funding typically requires less paperwork than a bank loan, but it may take more meetings. Investors are willing to take more risks than a bank, because they’re investing their own money, and are not obligated to repay the investment if the startup fails. However, they will demand that their share of the business is large enough to generate adequate returns on their investment.1인창업
They typically look for a dedicated and experienced team that can execute the business plan, as well as traction in the form of users, revenue, customers or partnerships. They also want to see a clear and compelling pitch and financial projections. Angel investors often become involved in the business, providing guidance and mentorship, leveraging their networks and seeking board seats.
Bank Loans
Startup businesses that require significant investments to grow or scale up may benefit from business startup loans. These loans are typically secured and backed by assets, making them less risky for lenders than unsecured loans. Startups must provide pay stubs, revenue reports and a detailed business plan to qualify for loan funding.
Credit cards are another option for startups to get the money they need. Choosing one with a 0% introductory APR can save you money on interest payments.
Startups that aren’t ready to put up personal assets can try microloans and small business administration guaranteed loans. These loans offer low rates and are available to those with good cash flow and a solid business plan. They’re also more likely to get approved than traditional bank loans.