4 Innovative ways to fund your startup
A business without money is like a car without fuel. You may have an innovative idea and excellent team to support you, but to run your business without funding is an impossible task. Although various options are available to attain funding, getting the right funding is just as important as your idea.
Equity funds, Bank loans, VC funds, Angel investor funds etc are the popular ways of fundraising, however, funding options vary depending on the amount, the time required to repay, risk appetite and nature of your business. If you are a startup or small business, then securing funds can be tough. Popular ways of fundraising are usually more accessible, but they are becoming increasingly competitive.
Image: Decrease in small business loans since financial crisis 2008
So how do you tackle this issue? Here are 4 innovative options to fund your business.
Crowdfunding is a unique strategy that engages large percentages of the population in building and supporting ecosystems of economic success. There are two primary models for crowdfunding. The first is the donation-based funding, where funders donate to a creative idea they think has the potential to stand out in the market. Once the project is live, they are rewarded with incentives like perks or products.
The second and more recent model is equity-based crowdfunding, where companies seeking capital sell ownership stakes online in the form of equity or debt. Individuals who fund become shareholders, consumers, and “evangelists” of the company. They help promote the company and earn the potential for financial returns from the company.
Image Source: Crowdfunder
2. Online lending (peer to peer lending)
Peer to peer lending (P2P) is a new and unique concept which has got the reputation as a good alternative to traditional business loans. The basic principle of online lending is, “one-to-one interaction of lenders and borrowers on the virtual marketplace (such as Prosper.com and Lending Club) without any interference from a middleman”. A major advantage of online lending is speed, as processing expects of an application, decision making and issuing of funds can be done within days. Due to its ease and quickness economist and former U.S. Treasury Secretary Larry Summers online lenders to eventually reach more than 70 percent of small businesses.
Image: How peer to peer lending works
Image Source: Business Insider
If you have an appealing idea and require a small amount of money, but you don’t qualify for a bank loan, then Microfinance institutes like Accion USA, Grameen Bank, Kiva etc. are a good alternative for you to raise capital. Microfinance loans (loans up to $10,000) are the relatively new system in the United States and they are gaining popularity very rapidly amongst those whose requirements are limited and credit ratings not favored by the bank.Though the loan amount is small, all loans have the same basic rules i.e. good track record of loan repayment, business growth, market opportunity etc.
Image: Microfinance loan process
Image Source: Slideshare
Factoring allows you to sell your account receivables (invoices) to a third party (the factor) to meet your short-term liquidity needs. Under the transaction between both parties, the factor would pay you between 70 and 90 percent of your total invoice value ( the amount due on the invoices minus its commission or fees). The major benefit of factoring is that you don’t have to approach financial institutions, which will take your 3–4 months to address your short-term liquidity needs. Factoring can immediately provide you funding necessary to keep your business going (purchase the supplies, cover the salaries to fill the new orders, etc.) while waiting for customers to pay for outstanding invoices.
Image: How Factoring works
Image Source: Clas
There’s no perfect option when it comes to startup funding. Options may seem sweet on the surface, but the devil is always in the details. You have to study your business’s credit profile in order to make right financial choices for you and your business. Also, you need to make sure that whatever funding decision you take today doesn’t end up hurting you tomorrow (i.e., won’t put you out of business trying to pay back). Having said that, I would like to conclude my thoughts with a quote by Urijah Faber,
“You need enough money to fund your passion. And if you achieve that, and follow your passion with diligence and intelligence, it will ultimately fund you.”