Fear of failure and inadequate resources are generally the top two excuses people give for not starting their own businesses. The first one is a personal problem that may require professional intervention. The second, however, can be remedied if you know where to look. Here are the 7 common sources of capital for startups.
Bootstrapping
When you don’t have a lot of money, but open your business anyway, you are bootstrapping. Gawker and PlentyofFish both started in their founders’ homes as side projects. The previous is now believed to be worth well over $100 million, while the latter has a $150 million price tag, Business Insider says.
The keys to successfully bootstrapping a business are to take extra special care of your customers, and to marry the concepts of cheap and smart with your expenses. In the meantime, keep searching for startup capital as your profits roll in.
Angel Investors
The Securities and Exchange Commission will approve someone as an angel investor typically if he or she can afford to lose an entire initial investment in a startup.These individuals have net worths of at least $1million or earn $200,000 per year.
Healthcare, Internet and mobile technology companies received 81 percent of angel funds in Q3 2013, according to Silicon Valley Bank. Entrepreneurs can check out the Angel Capital Association (ACA) for a list of available angel groups.
Venture Capitalists
Unlike angel investors who provide seed funds and mentoring in your day-to-day business activities, venture capitalists generally get involved only once a business is up and running. They want to see success before investing equity capital, as opposed to investing debt.
Venture capital is not easy to obtain. The Small Business Administration estimates 600,000 new business are established every year in the U.S. Forbes points out that only 300, or .0005 percent, get funded by venture capital, and only 3 percent of all VC funds went to startups.
Those seeking VC funds must draft a business plan and formal pitch to give to potential investors. Gaebler.com and VentureChoice.com have directories of VCs by industry and location.
Crowdfunding
There are five types of crowdfunding: equity, gift, debt, reward and revenue-based. Equity-based crowdfunding sites like Angel List and Seed Invest are highly regulated by federal government, thus the most difficult to navigate. Debt-based crowdfunding platforms pool capital and lend it out like a bank. Somolend and FundingCircle are two of the most well-known.
GoFundMe and Razoo are gift-based crowdfunding platforms that give contributors small gifts or simple “thank you’s” in exchange for donations. Indiegogo is a reward-based platform that gives contributors gifts if they donate a certain amount. Kickstarter is both gift and reward-based.
Friends and Family
A Bolt Insurance Company infographic compiled data from several sources and found 31 percent of small business owners borrow money from friends and family.
The downside of funding via friends and family is that it can strain relationships if you default. Zimple Money takes the awkwardness out of the equation. It acts as a middle man by making the transaction more official and less personal. Prosper Inc. and Virgin Money are two similar options to consider.
Bank Loans
Business Week estimates there are 80 million people in the U.S. with FICO scores between 600 and 700. Scores below 700 typically will not qualify you for a small business loan, at least not one with reasonable terms and conditions. If you must get a loan, it’s best to go through the Small Business Administration. The 7(a) and short-term Microloan programs are the two most common.
Incubators
These organization, also called accelerators, give entrepreneurs one-stop access to investors, mentors, legal services and other business-related intangibles. The National Business Incubation Association has a directory of more than 1,400 incubation platforms.
You can also find them via your local Department of Economic Development. Shop around and ask questions before deciding if an incubator can help your business take that next step forward.
