Once you’ve come up with a unique business idea, the first step in launching that business is to find funding. Before you officially open your doors, you’ll need startup capital to find a location and hire employees. If you don’t have all that cash handy, you’ll need to take out a loan or research alternative financing options. There are dozens of options out there for you, and the abundance of choices can be overwhelming at first.
Luckily, at Pango Financial, we know what we’re doing. We can point you in the direction that’s best for your business and financial situation. Read on for an easy guide on how to start your business off strong. How does small business startup funding work? Let’s look at a few of those options and review the process.
Why Is Startup Funding Necessary?
Can you start a business with no money? It doesn’t cost anything to come up with a stellar idea. But even if you’re starting a small online jewelry store from home, you’ll need money for materials and compensation for your time. More ambitious businesses will need even more startup money.
If you want to open a brick-and-mortar location for your business, securing that location will cost money. As your business grows, you’ll need to pay employees. Every business has different needs, so lay out a budget based on yours and get an idea of how much money you’ll need to borrow.
Sometimes you don’t necessarily need a lender to get that startup money. There are a few options that don’t involve talking to a bank or credit union about a loan.
- Self-funding: Self-funding is a “pull yourself up by your bootstraps” solution and uses nothing but your own money. If you already have the cash set aside, perhaps from your 401(k), start investing in your business right away.
- Crowdfunding: Do you ever see new business owners on social media offering gifts and other perks to people who donate money? Kickstarter and GoFundMe are popular platforms to garner donations. Crowdfunding is a low risk for you; the folks who give you money aren’t technically investors. You retain complete control over your business, and your friends and loved ones receive the satisfaction of helping you get on your feet.
- Venture capital funding: Why not find an investor who’s interested in your business? Venture capitalists are business-minded private equity investors with the cash to offer the startup funding you need. Mingle and network with potential investors. Also, develop a quick, engaging elevator pitch to let them know what your business is all about and why they should invest in your venture.
Series A, B, and C Funding
If you don’t have the cash to start running your business right away, there are dozens of ways to finance it through outside funding. One option is to go through a few rounds of funding through investors.
Seed funding is the first round that many business owners take—and it’s often all they need. Plant the seeds of a successful company with new business startup funding, whether from venture capitalists or loved ones. That money helps you take the first steps in your new business, like product development and market research.
Series A funding boosts a business beyond its first steps. Once you’ve established yourself and are beginning to build a client base, series A funding can help you expand it. This money often comes from classic venture capitalists and capital firms. To garner series A funding, you have to prove to your investors that you have a solid business plan and are on a firm footing.
Once you’re past the development level and have grown more in your business, series B funding can help your supply meet the demand that your business has encouraged. Series B works much like series A and shares many of the same players. However, some venture capital firms prefer late-stage investing. You may find yourself with even more investors, especially when your success is evident. You’ve proven that your business is a solid investment.
If you’re in the market for series C funding, your business has already proven itself a success. Remember that your investors want to see a hefty return on their money! They’ll provide funding to see you grow, whether you want to create new products or acquire other companies.
Small Business Loans
The SBA (Small Business Administration) isn’t in the business of loaning money. However, it does give you the green light for loans through their many programs. The SBA 7(a) loan is the most popular option for small business owners.
Once you’ve created a solid business plan, present it to the SBA to prove that you need the funds. When they approve you for the loan, you’ll work through a more traditional bank, credit union, or another lender.
SBA 7(a) loans can be up to $5 million, but most small businesses qualify for a much smaller amount. You will need a significant amount of money to put down, but if you can prove to the SBA that your business has unbridled potential, they may grant you a significant loan. In the meantime, make sure you maintain a good credit score to qualify for better loans and lower interest rates.
What can you use your small business loan for? If you’ve gone into debt paying miscellaneous startup costs, your SBA 7(a) loan could help you pay it off. In addition, you can use that loan to buy land for your business’s future home and any heavy equipment you need to get started.
As you start your new business, lay out a budget and determine how much money you’ll need to get off the ground. Which funding style is right for you? Some people turn to Kickstarter to ask their loved ones for funds, while others dip into their 401(k) for startup cash. Whichever lending option you choose, make sure you understand all the fine print and have an idea of where that money will go. Now that you know how small business startup funding works, you can choose your lender more easily. Rest assured that your business is on the right track when you have reliable startup funds.