Raising money for your startup is an arduous task for any entrepreneur. With the plethora of resources floating around on the internet, determining which funding method is right for your startup is even harder.
However, Dave Pike (a serial entrepreneur with 10+ ventures spanning multiple industries and Mentor for the Chicago Founder Institute) has written this guest blog post to help aspiring founders pick the best option for funding their companies.
You have a great idea but you need capital to launch. Will you self-fund and bootstrap? Will you take investment from others? There are several ways to fund your business from self-funding to debt to equity financing. The first step is to estimate how much money you will need in the first 6–12 months. Through my experiences and interviews with other entrepreneurs, I have created a preferred funding hierarchy. The first funding option on the list (free grants) is the most preferable and the last funding option (family and friends) is the least preferable since I don’t feel comfortable risking friends’ and family’s money. Start at the top of the list and work your way down until you have the funds you need.
1. Apply for Free Grants
Grants are funds received as gifts that you do not have to repay. Many government entities provide grants from the federal level to state and regional levels. Some corporations provide grants as well as organizations focused on funding specific communities. Grants are competitive, so make sure your business is appropriate and prepare a strong application. Here are some links to help you search for grants.
Federal Small Business Grants
- Grants.gov - comprehensive database of grants administered by various government agencies
- U.S. Small Business Administration - uses a questionnaire to help you find relevant grants
- SBIR.gov - grants for technology innovation and scientific research
- Challenge.gov - lists government grant competitions
- GrantWatch.com - lists grants for small businesses, nonprofits, and individuals
State and Regional Small Business Grants
- Small Business Development Center - provides you with a list of local Small Business Development Centers that you can contact to find grant opportunities
Corporate Small Business Grants
- FedEx Small Business Grant Contest - FedEx small business grant up to $25,000
- Business and Beer - live pitch competition for grants from$20,000-$100,000
- NASE Growth Grants - offers monthly $4,000 grants to small businesses
Specialty Small Business Grants
- Grants and Loans for Women-Owned Businesses
- Small-Business Grants and Resources for Veterans
- Small-Business Grants for Minorities
Once you determine the grants you will apply to, you are ready to write your proposal. Grant writing is an art. Thoroughly research the funding organizations so you can better tailor your proposal. Your goal is to create a compelling and well-organized narrative for your reader.
2. Crowdfund Your Startup
If your business sells a unique product, consider using a crowdfunding site like Kickstarter or Indiegogo. This allows you to take customer pre-orders and receive funding for manufacturing inventory.
3. Apply to Accelerators
Accelerators are highly competitive programs designed to help entrepreneurs succeed. An accelerator generally provides your company with funding (typically $20k–$100k), guidance, and connections. In return, they take a percentage of equity in your company (typically 5%–10%). You would have to move to where the accelerator is located for the length of the program (typically 3–6 months). You would join a community of other startups in the program, be provided with networking opportunities, and have the chance to elicit feedback from your peers. If you are comfortable with giving up some of your equity, definitely consider applying to accelerators. Be aware that accelerators are competitive, so carefully prepare a strong application. As an example, Y Combinator has an acceptance rate of less than 2%. In addition, many accelerators like to see two founders on their application, so you may have to consider bringing on a partner. Here are some of the biggest accelerators to check out:
- Ycombinator.com
- Angelpad.org
- Techstars.com
- Amplify.la
- Startx.com
- 500.co
- F6s.com/accelerators (search tool for accelerators)
4. Obtain Funding from an Angel Investor
Angel investors are wealthy individuals looking to put seed money into a venture. Pitching to an angel investor is a great way to validate your business, and there are many angel investor groups across the world. In exchange for providing you with funding, angel investors will take an equity position in your company. The downside of using an angel investor is that you lose some control, as the angel investor will more than likely take an active role in decision-making for the company. Search online for groups located in your city or state. Here are some sites and groups to get you started:
- Angelcapitalassociation.org/directory
- Gust.com
- Angel.co
- Startupangels.com
- Allianceofangels.com
- Goldenseeds.com/angel-network
5. Self-Fund Your Startup
Review your personal finances and see how much you can afford to contribute to your startup. Don’t mortgage your house, but maybe you have money in a savings account that you could leverage for funding. 57% of startups are self-funded. Your individual preference may vary between self-funding or using an accelerator/angel investor. If you are not comfortable giving up equity, then you should try self-funding first. However, if you want to de-risk your investment as much as possible, use an accelerator or angel investment before self-funding.
6. Apply for a Bank Loan for Your Business
Traditional bank loans will be more difficult to obtain since your startup does not have any history, assets, or revenue. However, most banks can offer you U.S. Small Business Administration (SBA) loans. This means that your lender will be protected if the business fails since the SBA will pay a portion of the loan back to the lender. This benefits you since the lender is more likely to provide you with a loan. There are several SBA loan programs but the two most common for startups are 7(a) loans and microloans. The vast majority of startups use 7(a) loans since they can be used for a wide variety of business purposes including working capital, equipment purchases, refinancing debt, buying a business, and buying commercial real estate. The maximum loan amount is $5 million, and the repayment terms can be up to 10 years for working capital and 25 years for commercial real estate. The drawback of the 7(a) program is that the application process can take months.
For a quicker option, consider SBA Express loans under the 7(a) program which take a few days for an approval decision. The maximum loan amount on an SBA Express loan is $350,000. Even smaller than Express loans are SBA Microloans. Their maximum loan amount is $50,000 and the loan can only be used towards working capital, not real estate. Their maximum repayment term is six years. The interest rates of SBA loans vary based on credit score, loan size, repayment schedule, and current market interest rates. To apply for an SBA loan, visit your bank and ask about different loan options, or you can use the SBA’s Lender Match tool at sba.gov/lendermatch.
Consider taking out a bank loan only if you’re using it to purchase a hard asset that you can sell if the business fails. Hard assets include vehicles, buildings, and machinery. I would not seek a business loan if you are using it to build a soft asset like a website or mobile app since there is no resale value if the business fails.
7. Seek Money from Family and Friends
I use this as a last resort since I don’t feel comfortable with the risk of losing my friends’ and family’s money. Also, mixing family and friends with business can strain the relationship if the business fails. However, sometimes this is the only way to get your venture off the ground. If you choose this option, make sure to make it official by writing out and documenting the loan. Communicate progress regularly to demonstrate professionalism and show you are taking their involvement seriously.
You may have noticed that I did not include credit cards or venture capital on the list. Financing your startup using credit cards is a risky proposition for an entrepreneur. Interest rates are higher in the long-term, and you will be personally responsible for any debt if the business fails. As for venture capital firms, they rarely invest in early-stage companies. They need to see traction, customers, and growth.
If you'd like to learn how to start a fundable company, then apply to the Founder Institute today!
Author Bio
David Pike is a serial entrepreneur with 10+ ventures spanning multiple industries. He is the author of the book The New Startup and has been featured in Forbes, The New York Times, New York Post, Huffington Post, Business Insider, and VentureBeat among other publications. David is a mentor and advisor for startups at Founder Institute, and his writing has been published in Investment Advisor and Under30CEO. He has guest lectured on entrepreneurship at his alma mater, the University of Michigan, where he graduated with a BSE in Industrial Engineering.
