Business Capital – Finding Funding and Understanding the Complicated Landscape
You have a business idea and plan, but now you’re looking to raise business capital. Where to start? Saving money is hard, and asking for money isn’t any easier.
Getting business capital for your small business varies depending on the industry. There are several different types of funding that fit better for different business sectors. Here’s a breakdown of popular funding methods for different industries:
Startups in the arts and entertainment sector, according to data released by Seek Capital, obtain business capital mostly from VCs, and government-backed loans. They cost about $25,000 to $50,000 to start, and 53.1% make it past the first five years.
Real estate startups mainly get their business capital from government-backed loans and personal savings, and they cost anywhere from $10,00 to $25,000 to start. About 59% make it past the first five years.
Retail is the largest sector of the economy, and employees the most individuals. Most startups are funded through grants, bank loans and government-backed loans. They cost around $50,000 to $100,000 to start, and have a 55.1% five-year success rate.
Most information/tech startups use venture capital (VC) money, grants or credit cards. They’re the cheapest to start – $10,000 to $25,000 – but has the lowest five-year success rate at 44.3%.
Education startups are obtaining business capital primarily through business and personal credit cards and grants from the government. They’re also relatively cheap to starts at $10,000 to $25,000 and have a 56% five-year success rate.
Transportation and Warehousing
Transportation and warehousing startup’s main methods of funding include bank loans and personal and business credit cards. They cost about $25,000 to $50,000 to start and have a 50.1% five-year success rate.
So, what are the different modes by which startups can obtain business capital?
This is usually the most popular way to obtain business capital for a startup. Over 90% of startups get started without loans or grants. You don’t have to solicit for money, and you don’t have to worry about giving up ownership of your company. This method works if you
1. Have savings to spend and
2. Have time to save up.
Saving up can, however, take attention away from your business. Sometimes ideas need immediate action, and in order to capitalize on our quickly-changing consumer economy, you can’t wait to save up to act on them.
Friends and family
This is often one of the first lines of finding business capital. Depending on the industry your startup is in, crowdfunding from friends and family might be the go-to. According to Martin Zwilling for Forbes, professional investors like to see that people trust you, and often by means of investing in your company. This doesn’t mean you shouldn’t proceed with caution, however. Taking money from your friends and family could affect relationships – if they don’t understand the nature of the startup world, or if they’re insistent on knowing the details of where their money is going, it could put a dent in friendships or family relations.
Angel investors are high net-worth individuals with a history of funding startups. The hard part isn’t finding them – they’re everywhere. The hard part is convincing them to invest in your ideas. You have to have a flawless plan and an even more flawless pitch. Lilach Bullock for Forbes says, “Find the right angel investor and not only will you benefit from their financial support but also their wisdom: oftentimes, they offer mentorship as a side dish alongside their capital.” There are also Angel Groups, which are groups of angel investors who pool their investment money. Angels are usually good for those looking to raise $25,000 to $250,000.
Grants are exactly what they sound like – business capital you don’t have to pay back. There is an infinite amount of grants out there, whether they be from the government or from other companies. They usually have some precursors, though. Many grants require your business to provide certain services or products, but some don’t. They’re also very competitive. There are many for diverse entrepreneurs and business owners – women, minorities, veterans, etc. Grants require pretty long application processes and aren’t often for that much, but the temptation of free money is usually all it takes to give them a shot.
The words might make some business owners cringe. Venture capitalists. But they’re often a vital part of getting business capital. VC money usually comes from firms, and they usually want quite a bit of equity and control. Zwilling says not to go after VCs unless you need more than $1 million (so, not in the earlier stages), and you should be prepared to spend at least six months on the process.
Becoming increasingly popular, crowdfunding is a good way to use your already existing network to raise business capital. There are several online platforms, like Indiegogo or Kickstarter, that give you the ability to collect small sums of money from grassroots support. Naturally, the sites take a percentage of that earned. There are also some platforms that let you raise money via equity crowdfunding, meaning that individuals can actually receive shares of your company in return for their donations. These platforms, however, vary by state.
Sometimes, you just need a good old-fashioned bank loan. There’s nothing wrong with using loans to finance your business, as long as you’ve got a plan to pay it back. You retain full ownership of your company (as long as you make the payments), and you can use it to build your credit and get better terms in the future. Bank loans can also give you larger sums of money, if needed, and can be tailored for exactly what you need, like equipment. The drawback is having to pay interest on what you borrow.
You can also obtain a line of credit and just use it for what you need. There are also SBA loans, which are backed by the government and have better repayment terms. These are competitive, but the good news is there’s a lot of them.
Interested in obtaining business capital through a loan or line of credit? Or, just want to know more about obtaining business credit? FaaSfunds can help. Reach out to us today to sign up for our FREE platform.