10 methods to raise funds for your business idea or Startup
All startups or businesses need money at the beginning. Funds that will help you achieve every goal like the software production, the commercialization, a website, a team, maybe an office and each investment that you have to do in those first steps. It could happen that you don’t have the amount of money for paying all of these things, but it is not necessary either. There are many financing methods that you can practice for getting enough economical resources, and this article is about that.
There are financing methods, alternatives and traditional: know them
A method is a particular form or procedure to accomplish something, and in this case, we want to accomplish funding and all the financing is needed to develop your business.
As we said, there are traditional methods that involve banks and traditional investors, and also, with the advance of technology emerged new alternatives like crowdfunding, alternative lending, and others that we will see here.
Let’s go with the traditional financing methods first
When we say traditional methods is because they involve banks which are the oldest way to get funding for a project with loans, micro-credits, etc.
1. Bank Loans
This is the most traditional method. Basically, you look for credit in the bank. This method is one of the most structured and you need to comply with many requirements.
For example, you should have a good credit score. If you have debts or another loan pending it would be really difficult to get more money from the bank.
In addition, if you want a bank loan you should have to present a complete business plan with all products and services you will bring reflected. The mission and the vision of your business, financial predictions in short, medium, and long term, and lots of requirements for showing the whole potential of your business plan, and give to lenders all information they need to be sure of the profit you would have to settle loan payments; and that includes the interests.
Usually, bank loans have legal regulations and these are other requirements you need to follow.
This method is one of the oldest, and nowadays many people don’t prefer them.
Common requirements for Bank Loans are:
- Good Credit score of the owners.
- Many banks require that the business shouldn’t be new, that at least has 1 or 2 years of establishment
- Many banks also require that you have at least account with them, and many times that this account has more than 1 year.
- Leasing agreements
- Ongoing contracts
2. Credit Cards
This method is very common. Especially when entrepreneurs need money faster and immediately.
In this financing method you only need a credit card with a balance in hand and use it to the first things you need to buy and pay at the beginning of your entrepreneurship.
Some people prefer this as the first method in the initial step because you don’t need to follow so many requirements, and there are not intermediaries, actually, you wouldn’t have to convince investors or people in the bank unless you want an extra credit or a special credit in your card.
But we don’t bet very much for this method, because it could be insufficient for starting a business, also it generates too much interests, and naturally credit cards are not thought for this kind of invest. For that reason, all banks have loan programs, micro credit program, even financing programs for entrepreneurs.
3. Government grants and loans
Depending on the country you are, It is possible to get financing from the government in a kind of microcredit or a grant.
This would happen if your business idea contributes to the growth of the country or develop a particular industry or area.
For example, the US Agency for International Development that has many programs where you can participate in getting a government grant. One of their program it is the Development Innovation Ventures, National Telecommunications & Information Administration Programs, or maybe the Corporation for National and Community Service, where you can apply for grant programs like AmeriCorps, Social Innovation Fund, etc.
In this case, you need to fulfill some legal requirements that will be specificated for the same government, and eventually, you will have a compromise with the government and the country.
4. Lending Companies
These are companies that bring lending, but they are more dynamic and modern than a bank, and the main feature of this method is the fact that they don’t ask too many requirements, and usually provide online registration forms to check availability for loans.
These lending companies support small business and startups, by providing funds for theirs their projects.
Some examples of these companies are Capital One, which is a company that can help you to find credit cards, auto loans, they provide savings or checkings account, and bring you banking services without being a bank.
5. Nonprofits and Foundations
This kind of organizations are famous for bringing money or investment to an audience, usually minorities. It could be for women, populations of specific religion or race, etc.
An example here in Miami is the Miami Bayside Foundation. They bet “to advance economic development in the city though support of minority business and education”.
They have a loan program, and also an educational scholarships programs in the city.
Now, It is time for alternative financing methods
On the other side of traditional methods, alternatives are related to people, websites, and every non-bank institution that bring money to your project.
These methods are newer than the traditional, but they are really popular in the startup culture. Actually, some people prefer them.
1. Friends and family
Some entrepreneurs think that everything should stay in the family. Maybe you are one of them.
That’s why the first alternative method that we consider to get the funding it is the lending by family or friends.
Of course, they are relatives to you. If is in their hands they will help you, and you would not have to be so formal, follow many requirements, and in general, make a good and beneficial treatment.
2. Venture capital
When a group of people unite their resources, invest their money in a business project, and take part ownership in exchange for their capital, we will be in presence of a venture capital group or firm.
These groups love to invest their money on new technologies and companies, and they also love these financing methods because not only bring the money, they can give ideas and participate in business management.
If you apply for this kind of method you should know some instruments that Venture Capital use for lending money.
For example, a term sheet which is an important document where the Venture Capital (VC) firm indicate that has the intention of invest and make all diligence for preparing and conclude with the definitive financing document.
A term sheet is made after that all members on the VC firm approve it.
If you finish and sign a term sheet is likely to happen that you will get complete financing.
This instrument has information as the value of your business approximately, the composition of the directive group, the rights of investors will have before and after of the financing, etc.
Other instruments you should know are SAFE, Equity Agreement, etc.
The first translates Simple Agreement for Future Equity (SAFE). This instrument was developed for YCombinator.
The SAFE investors make an investment in cash and this is changed for stocks in the company in future financing round or discounts.
This SAFE doesn’t generate interests it is very useful for business in very early stages.
If you are in Miami or in the US, there are some options for Venture Capital firms.
One of them is the H.I.G Capital with a full of $24 billion.
They have eight offices in the country, including in Miami, six offices in Europe, and three in South America.
A local firm also is the Krillion Ventures. They are likely to invest in local companies in South Florida. This is its portfolio.
3. Partner financing
In this financing method a partner who can be a bigger brand in the same area of your business, participate and bring money in exchange of distribution rights, special access to your product or service, etc.
It is not lending, It is more than a sale of shares.
4. Angel investors
Angel investors are similar to venture capitals. Actually, people tend to confuse them. But they have a little bit differences. For example, venture capitals are a group of large companies commonly while angel investors are individual investors who are likely to invest in startups on early stages.
Angel investors are people with economic resources that bring money and pieces of advice for entrepreneurs. It is a financing method more personal. But they also are in firms.
Another difference with the Venture Capital firms is the rounds for lending the money. This rounds of invest can be of friends and family, seed funding, series a, b, c, etc. Its specialty is the seed funding and the series A.
Angel investors also manage fewer resources than Venture Capital firms, its investment is lower, and here is an Angel investor called Mark Kingdon, who has been a three-time digital CEO. He is the face behind Quixotic Ventures, “one of the most straightforwardly named early-stage investors. Quixotic means exceedingly idealistic; unrealistic and impractical, the term seems very appropriate for early-stage investing,” according to Mark.
He has been investing since 2005 on Social Media and Social Media Enablement, actually, he is an investor of Twitter.
Also, he bet for E-Commerce and E-commerce Enablement, and Digital Media platforms.
With this alternative method, you can get funding from websites where investors can support your business no matter where they are.
Even you can support this kind of small business.
These platforms were thought for receiving investment from many many investors that can be anonymous too.
For doing any of these methods, you need to have very clear your business model and many aspects that we explain better in another post about the perfect pitch deck which is the speech you have to do in front of every investor or organization you want to involve in your project.
You can do crowdfunding for different reasons like early access to products, a better prize, swag, etc.
Some websites you would use for this financing method are Kickstarter, which is one of the most used, Indiegogo, RockHub, Crowdrise, SellABand, GoFundMe, and others.
This method translates Initial Coin Offering. What does it mean? Well, someone offers new cryptocurrencies or crypto-token to investors in exchange for cryptocurrencies more common and with more value like Bitcoin and Ethereum.
It has been used since 2013 but in 2018 was the preferred financing method for startups.
You offer new technology or crypto and you get very much money to invest in your business idea.
Ripple, Mastercoin, even Ethereum was created behind this method.
Once you saw these possible financing methods choose the one that best suits you and put it in practice. When you collect all the finance you need and your project is ongoing tell us your experience.