Venture capitalists and angel investors can be very useful external sources of capital for established businesses, but the value they bring to new ventures and start-ups is questionable at best. Entrepreneurs should aim to finance their ventures by means other than venture capitalists, private equity and angel investors unless a large fortune is needed to finance business start-up activities or they choose to work with investors specifically focused on very early-stage start-ups. Here are eight strategies in which many entrepreneurs might choose to finance their ventures:
Business Credit Cards
Many successful businesses, such as Under Armour, were financed through credit cards in the very early stages of their venture. While credit cards are not necessarily the most ideal source of financing as they do have their drawbacks, if used correctly they can be a very effective source of financing.
How to use a business credit card correctly:
- Effectively manage cash flow by not having to pay for purchases until the end of the billing cycle.
- Use to pay for start-up fixed and upfront costs so you can make your first sale
- Plan ahead on how you will pay off the balance, then create a backup plan
Things to look for in a business credit card:
- If you will be carrying a balance, look for low APR
- If you will not be carrying a balance, look for great cash rewards and introductory promotions
Supply Chain Financing
If you are selling goods, see if your supplier, manufacturer, or distributor could issue you a very favorable loan or line-of-credit. After all, the more successful you are, the more successful they are, and they understand this. You will be surprised how common this is – many suppliers, manufacturers and distributors even have set procedures for these circumstances. All you have to do is ask.
If your venture needs less $35,000 or less, you should consider taking out a microloan. A microloan is a small, short-term loan available to small businesses that can be used as working capital or towards purchasing new inventory, supplies or machinery. These microloans are made available through the SBA but are distributed by intermediary nonprofit community lenders. Although these loans usually do require some sort of collateral, they also provide very favorable terms and are quick and easy to receive.
Business Plan Competitions
There are numerous business plan competitions across the country dedicated to awarding prize money to selected entrepreneurs to finance their businesses. While the vast majority of these competitions are directed towards undergraduate and graduate students, there are plenty of local and state competitions opened to the public.
Many schools such as University of Texas Austin host business competitions opened to all students at accredited universities. Other colleges such as University of Maryland host competitions open only to their students.
If you are not a student, don’t worry. Try searching Google for business competitions in your state or county as many local chambers of commerce host competitions to support local businesses. For instance, there is the Washington DC Economic Partnership Competition, Jefferson City Area Chamber of Commerce Competition, Enterprise Center Boston Competition and the Bizzy Awards.
All of these competitions are great because not only do you get great experience pitching your idea to investors, but you have the opportunity to win a substantial amount of free money and receive tons of free press.
Grants are essentially free money, and are one of the most desirable sources of funding for just that reason. Unfortunately, they are also one of the most difficult to obtain. Most grants are awarded by state and local governments, and most grants are reserved for businesses that have the potential to provide a great service to the community, such as medical research and high-tech companies. Searching for grants can be a very grueling process with scams around every corner. Start your search at Grants.gov and State Small Business Grants, and be weary of any non-government or for-profit entity.
While not the most creative source of financing for a start-up, personal savings remains to be one of the most popular methods. Personal savings allows entrepreneurs to own 100% of their company’s equity. Relative to other financing methods, personal savings provides very attractive terms as it leaves you liable to no one but yourself, and the cost of capital is simply the opportunity cost of investing that money elsewhere. Personal savings should always be strongly considered as it is one of the most ideal sources of financing.
Friends and Family
Not even experts agree on the role friends and family should play in financing a start-up. In one hand, financing from family and friends can be fairly simple and straight forward as there is already a mutual respect and understanding. Friends and family will be more willing to give you very favorable terms and might also be less stringent in their rules on how the money can be used. However, in the other hand you have the possibility of straining important relationships in your life over money. If the business starts going sour, there could be unnecessary pressure coming from the very people you need support from. In the end, this source of financing is up to each individual entrepreneur and depends on a number of specific circumstances.
Many start-ups are very short on cash and credit. Paying for a necessary good or service might be impossible, leaving many entrepreneurs in a catch-22 situation. One possibility would be to barter for that necessary good or service. First, build a strong relationship with the other party, and then make a proposition. Remember, always consider the other side’s point of view and “what’s in it for them”.
The above are suggestions as ways to finance a start-up business, but ultimately each situation is unique. Always evaluate each possibility thoroughly and compare to comparable alternatives.