7 Reliable Sources of Funding for Your New Business
The number one reason for the failure of startups around the world is running out of cash or failing to raise new capital. It’s the reason 38% of startups fail.
It’s understandable.
New businesses have no history of financial stability. It makes them a risky investment for lenders and investors who generally prefer a business with a proven track record of profitability.
Besides, new businesses have limited assets and collateral that can be used to secure funding.
However, this doesn’t mean sources of funding don’t exist for new businesses.
There are many types of funding you can use depending on the:
- Type of business and industry
- Amount of funding you need
- Credit risk associated with your business
- Availability of collateral
Let’s look at these options.
1. Bank Loans
Small business loans from banks and credit unions are a great source of term loans or lines of credit that you can use for your new business.
In most cases, you’ll need to provide a business plan and financial projections for the next few years. They’ll show your capability to pay back the loan and increase the chances of getting approval.
The bank will also assess the legal status of the business before approving the loan.
We recommend that you use a reliable business formation service like Inc Authority that helps you set up an entity the legal way and keep it compliant.
You can read this GovDocFiling detailed review of Inc Authority to know more about this agency. It’s best to get several offers and choose one with the most favorable terms.
Although you need collateral and a strong credit history to access most bank loans, a major advantage with this type of funding is that you retain absolute control over your business.
2. Government Funding
You can get grants and loans from most federal, state, and local governments.
Government funding is a good option for a new business because it tends to have lower interest rates and more favorable terms than bank loans.
The Small Business Administration (SBA) also has great grant programs for nonprofits and businesses engaged in scientific research and development. However, it doesn’t provide funding for starting a business or expanding. You can only access SBA-backed bank loans.
3. SBA-Backed Bank Loans
SBA has a program where they guarantee bank loans offered to entrepreneurs who want to start or grow their businesses.
These SBA-backed loans have a lower interest rate.
A major advantage is that the guarantee by SBA makes it easy to get approval for bank loans that you’d otherwise not get approved for. This is because the SBA sets guidelines for these loans that reduce lender risk.
4. Venture Capital
This is where you get funding from investors in exchange for ownership in the business and in some cases, an active role in the business’s management.
Venture capitalists mostly invest in businesses that are in a promising market. They target businesses with very high growth potential, such as businesses in high-tech, biotechnology, and other innovative industries.
If you go for this type of funding, it’s best to choose investors who bring relevant experience and knowledge to the business that can facilitate its growth.
5. Crowdfunding
Crowdfunding is where you raise funds by collecting contributions from a large number of people using a crowdfunding platform. These contributors are known as crowdfunders.
What makes it ideal for a new business is that it leverages the power of crowds. By getting small contributions from a large number of people, you can get access to more funding.
There are three main types of crowdfunding models you can use to get funding:
- Donation-based crowdfunding: This mainly works for charitable organizations and non-profit businesses. The crowdfunders don’t expect any rewards or returns from their money.
- Reward-based crowdfunding: In this case, crowdfunders can get a non-monetary gift or incentive in return for their contribution, such as merchandise.
- Equity-based crowdfunding: Crowdfunders get equity in the business that is proportionate to the size of their contribution.
6. Self-Funding
This is where you rely on personal finances and profit reinvestment to start and run the new business. It’s also known as bootstrapping.
Instead of relying on outside investments, tap into your 401(k), savings account, or cash value insurance policies.
Keep in mind that you’ll be taking on all the financial risk. It’s best not to invest more than you can afford to lose.
7. Peer-to-Peer (P2P) Lending
Peer-to-peer lending lets you borrow funds from other individuals to finance your business through fundraising platforms.
The platform matches borrowers with lenders and is also in charge of conducting credit assessments and managing the entire loan process.
All you have to do is make a loan request. A lender can then decide to fund the entire amount or only a portion. This means multiple investors can fund your loan.
Most loans obtained from P2P lending sites have a high-interest rate because of the higher risk involved.
However, your chances of getting the funding you need for your business are higher than other sources like bank loans.
Conclusion
There are diverse sources you can use to get funding for your new business. You don’t have to rely on only one source.
For instance, you can apply for the government funding you qualify for and top up the difference using personal savings and a bank loan.
Assess the terms provided by each lender and try to go with the most favorable in terms of interest, repayment period, and installments payable.
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
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