How to Get Funding for Startups: It Can Be Done!

When us financial wonks write about business funding, we have a tendency to put the cart before the horse. You can find a million articles about growing businesses and increasing your annual yield, but that’s useless advice when all you have is a good idea and an empty bank account. Raising capital for startups is an esoteric subject we don’t like to touch, yet it can make the difference between living paycheck-to-paycheck and becoming a huge success for so many people.

It costs plenty to get a new company off the ground – enough to make many a novice entrepreneur go broke in the process. Without a good financial plan, you can find yourself deep in the red long before you’re ready to do business; the greatest startup concept in the universe can’t survive a lack of funds.

Insufficient capital and the difficulty of fundraising for startups discourage a lot of would-be business owners, but it doesn’t need to be that way. If you have a dream of running your own company, there are ways to ensure you have access to capital that will help you achieve those goals. This money doesn’t grow on trees, but it exists in abundance if you know where to look.

Every person, business, and investor has a different path; the road you take to entrepreneurial success might be any of the options below or a combination of all five. The more you know about each alternative, the better your chances things will work out.

1. Start Local

Even if your business model exists entirely online, people in your community will likely be the first to hear about it, from your friends and family if nowhere else. The local support system provides an instrumental role in the development of a new company, and it’s where you should start when looking for initial funding.

The country’s biggest banks get the most attention for their lending options, but local business development centers and SBA offices can set you up with the best loans and a more personal borrowing experience. When it comes to borrowed business capital, you don’t want to be another faceless name in a sea of anonymous entrepreneurs. If given the option to take money from someone interested in your business and community, that’s probably just how to get funding for your startup.

The chamber of commerce in your city could provide a good starting place. If there’s a two- or four-year college in the area, you can check out the business resources available there. The success of local businesses is of the utmost importance to municipalities, so it shouldn’t be hard to find some source of guidance. You might even stumble upon a free program that shows you how to find angel investors.

In addition to being open to local funding, you should gather local information. Find out what financial and legal roadblocks might hold you up so you don’t get unexpectedly derailed. If you plan to open a physical store, for instance, meet with inspectors early and often to avoid fines and permitting issues once your project gets underway.

We can gather useful information online with great ease. Unfortunately, a business plan that worked for someone in rural Minnesota might not take off in suburban Texas. Connect with the people you’ll eventually need to lean on for support. Learn from those who came before you and try to work with those who sincerely want your business to succeed. Plenty of research and planning needs to be done before you even start thinking about how to get funding for your startup, especially because investors will want to see that you have your ducks in a row.

2. Scrounge Like Mad

More commonly you’ll hear this method referred to as “bootstrapping,” insomuch as every penny you can muster will become part of the bootstraps by which you pull your business up. Whatever the case, the goal is to do your best with what you’ve got. It’s easier to raise additional capital for a startup that has at least some track record to boast of, so getting started and scaling up later makes a lot of sense.

For many, searching for coins under the couch and liquidating an asset or two motivates their business launching process. The money flowing into the young company has a backstory that a loan can’t compete with. When you hear stories of people bankrolling startups through yardsales, it’s hard not to find that romantic and inspirational.

The bootstrapping approach typically involves debt as well. Instead of a small business loan, entrepreneurs will lean on credit cards for incremental funding. You’ll find this strategy to have very distinct pros and cons: with revolving credit, you can spend as necessary and have more freedom with repayment. However, you’ll likely have a higher APR and, if you start falling behind, you’ll pile up more debt than you would have with a standard loan.

Before borrowing, think about how smarter budgeting might help your scrounging effort. Since you’re already going through the massive life change of starting a company, can you change other elements of your routine that might free up business funds? Perhaps a less expensive vehicle or a cheaper living arrangement? I would never advise someone to put their property on the line for a startup, but if your family can downsize from a three-bedroom to a two and still live comfortably while boosting your cash flow, that might be the right move.

The price of a starting a business overwhelms a lot of people, but you can get past that by reframing your thoughts about how you might cover those costs. Think about your assets, liquidity and potential overhead, then start crunching the numbers to see how much can be done with a little bootstrapping.

3. Check Out the Alternatives

Big banks want big borrowers. For the small operation in need of a sensible boost in cash, you should look into the alternative lending sites developed for just such financing needs, including crowd equity funding.

You can find hundreds of online lenders with sufficient cash reserves and positive reputations. I think peer-to-peer finance is a strong option, but if you hear good things about another lender you should feel free to check it out. Above all, take the time to shop around to see what kind of rate you can get on a crowdfunded loan.

In general, the bigger the lender, the larger the minimum loan requirement. When you’re opening a small company with yourself as the only employee, $25,000 might seem like way too much, even though that is a small sum in the eyes of many lenders. With online options and crowdsourcing, you can get the amount you need and even have a mediocre credit score overlooked. Bad credit will still have its drawbacks, but won’t lead to immediate refusal the way it does with traditional lenders.

Be very thorough as you inspect the fine print with an online lender or crowd equity funding website. You want to make sure you aren’t securing a big loan with something you can’t afford to lose, and you’ll really want to be clear on when the loan will process so you don’t find yourself waiting on cash you thought would arrive instantly. The smaller lenders can sometimes sneak past regulators and operate a little more shadily, so ask questions, read customer reviews, and make sure everything appears to be on the level.

Going with a smaller financier also opens the door to aligning with a lender who has knowledge about your particular industry. This is one of the major draws of federally backed SBA loans. Although approval doesn’t come easily, a processed loan will include assistance and advisors who will want to see the company succeed. When loan amounts go down, lender investment oftentimes goes up, as the company providing the funds hopes success will lead to future borrowing.

With a consistent lender willing to give modest loan amounts, you can get through the opening of your business without putting yourself too far in the red. The less you play from behind, the better your odds of turning a profit within just a few years.

4. How to Find Angel Investors

A loan allows you to raise capital for a startup, but a venture capitalist or angel investor can help ensure the money goes where it’s needed most.

As I’ve intimated with basic loans, it can be really helpful to get money from someone who understands your plight. The very best way to find such a lender is by going through an individual investor who backs companies that he or she understands and believes in. Just because an oil magnate has money doesn’t mean that person will be the right partner for a high-end coffee shop. Meanwhile, a low-profile restauranteur could bring all the advice and contacts you need to the table.

To break it down very simply, you’ll be looking toward either a venture capitalist or an angel investor. These options are similar and yet tremendously different, so it’s worth educating yourself a bit.

Venture Capitalism

Traditionally, venture capitalists (VCs) operate as limited partnerships, making high-risk, high-reward investments on behalf of clients. These firms target growing companies that don’t yet have access to the equities market.

While there’s nothing stopping a VC from backing a startup with no business history, it’s not all that common. You’re much more likely to attract these investors if you have an existing product or IP and need a little help commercializing. This requires less effort from the venture agency and can deliver relatively quick returns to them. Business owners can also expect to put up a smaller percentage of their enterprise when the investment comes later in the process; if you get help in the very beginning stages, you might relinquish 30, 40, or 50% of your stake.

If your capital comes from a partnership with a board that’s working on behalf of a number of rich investors, you have to take the good with the bad. On the plus side, the VC is giving you money that doesn’t belong to them. They won’t make the investment without strong conviction. However, and this is the main argument against VCs, you’ll be one of their many investments. If they hit on eight out of ten new businesses, that’s a good return. You invariably become a bit of a statistic, even with the investors eager to see your business do well.

VCs have different tactics, so you might find some that don’t quite fit the description above. By and large, you can expect to work with a venture capitalist firm if you’re able to secure this funding.

Angel Investors

Angel investors provide a more personal approach that comes with more assistance and greater oversight. With a proven entrepreneur looking to help your business succeed in exchange for a cut of the revenue, you gain street cred and the funds needed to get the ball rolling.

Finding an angel investor can be easier than securing venture capitalist money. For starters, the amount needed for a business in the formational period opens the door for entrepreneurs who don’t want to invest millions of dollars. Figuring out how to find angel investors who will return your phone calls usually proves easier as well, since a single wealthy donor can be found virtually anywhere – next door, within the family, through a connecting website – whereas an investment firm interested in your project may be harder to get in contact with.

Speaking as an angel investor, I think this provides an exciting opportunity for everyone involved. People like myself enjoy taking an active part in our investments. I also find a great deal of fulfillment in helping an entrepreneur turn their passion into a profitable operation. Meanwhile, having an angel investor in your corner can deliver not just a boost in capital, but connections and know-how that only come from years of experience.

The right investor can drastically alter the course of your business. If you fear losing control, you might not want to cede a stake in your company to a hands-on investor. On the other hand, if your primary goal is to get things up and running and you welcome a little help, start looking for angels.

5. Friends and Family

The quickest, most accessible, and yet often overlooked option. I understand the feeling of hesitation that comes with asking for help, especially when it comes to money. To approach mom and dad while you’re still $80,000 deep in student loan debt to ask for a business loan is uncomfortable at best. The problem often lies in the framing of the request, though. A loan from Aunt Sue is very different from inviting Aunt Sue to join a business venture.

You won’t convince people to pony up for a cause they will never believe in, so don’t put in the effort. At the end of the day, you only want money from people who care more about your project than they do the immediate return. It’s far better to have people pulling for you to succeed than watching over your shoulder and criticizing every misstep.

For these reasons, I’ve found that friends – and friends of friends – often make the best investment and business partners. Your parents and other relatives might not share your interests or passion for starting a new corporation, while a mutual acquaintance with a similar background could provide the funds, insight, and the energy you need to move things forward.

Through various businesses that I’ve owned or been a part of, I’ve crossed paths with dozens of people from all walks of life. In this diverse bunch of entrepreneurs, there were always common goals and dreams. They committed time and money to the project at hand because they cared about it, and that made all the difference.

If you need to raise capital for a startup, don’t be afraid to ask your family. Ask your friends and see if they know anyone who might be interested. Above all, search for people you want to work with and who seem interested in what you’re doing. If you’re just after the loan and not a working relationship, you’re much better off going through an alternative lending or crowd equity funding website.

Whoever you are, whatever you do, and wherever you’re starting from, the money needed to launch your company can indeed be found. The easiest option might not be the best for you, so take your time to select the right source of funding. If you’re smart about the upfront financials, you put yourself in a much better position for success.

Make it happen!

Taylor & Megan Kovar

The Money Couple