Business loans are the most common way to fund your startup idea. A very simple transaction takes place; you borrow money from a lender (usually a bank) and you will pay this money back with interest over an agreed-upon term. Obtaining a loan depends on the state of your business plan and idea. If the bank doesn’t think your plan is up to scratch, they won’t let you borrow any money.
For the most part, loan applications tend to be successful if you have a viable business idea and structure. The benefit of business loans is that they can help inject your company with some much-needed cash. This could assist you in starting your business from the ground up or giving you additional funds to aid with rapid growth. Unfortunately, there’s one major drawback: you end up in debt.
The more money you borrow, the larger your debt will be. As such, it’s smart to think about alternative ways of funding your business that doesn’t put you in debt. Many options present themselves, yet these four are the best ones to consider:
Investors
If you want to receive a large influx of cash without any debt, investors are probably your best bet. In essence, you find people who want to provide financial backing for your business. What do they get in return? It depends on the investor, but most will look for ownership equity. Simply put, they want to own a stake in your business. Generally, most investors will be after anywhere between 10% and 25%. If someone demands more than this, you should be a little cautious!
What types of investors are there? Usually, you have two types:
- Angel investors
- Venture capitalists
Angel investors get their name as they are the ones who typically look to invest in startups. These investors are eager to help companies get off the ground when nobody else is looking to fund them.
On the other hand, venture capitalists are investors who will give you a lot of money, but they typically only invest in slightly more established businesses. Once your company is up and running, a venture capitalist can be a fantastic way of getting an injection of cash to help you grow.
Overall, the upside for investors is a lot of money without any debt. The downside is that you give up a stake in your company.
Business Grants
The next funding option is a business grant. A grant is a sum of money that you have access to without needing to provide anything in exchange. Typically, they’re offered by governments looking to help small businesses grow. After all, a thriving small business sector is the backbone of a strong and stable economy.
If you’re interested in seeing what grants are available for businesses in the US, check the SBA website.
What’s the catch? Typically, business grants are only available for specific companies or purposes. For example, you could get a grant to help with research and development. This would mean all of the money has to go on R&D, and you’d need to prove that to the government as well.
Nevertheless, it’s a chance to basically get free money with no strings attached. You don’t have to pay grants back, and you certainly don’t give up any equity in your business.
Scholarships
Typically, you think of scholarships with regard to education and getting into college or university. However, there are genuinely some scholarships available that will help you get a bit of extra cash to fuel your business idea. Things like The Quality Company Formations Scholarship can give you money that goes towards developing your business concept and getting it off the ground.
Naturally, the caveat is that scholarships are only available to students. So, if you’re currently studying and have plans to start a business, look for any scholarships that might reward you financially, making it a bit easier to get your plan off the ground. The benefit is that you also get free money. It’s kind of similar to a business grant, only with fewer restrictions on what you can spend the money on. Of course, some scholarships might be more specific than others.
One possible downside is that scholarships may not give you enough money to fully fund a startup. Still, every little helps!
Crowdfunding
Finally, you have crowdfunding. Plenty of crowdfunding platforms exist that can help you generate funds for your business. This has the potential to raise a lot of money – we’re talking hundreds of thousands of dollars. It’s a straightforward concept: you put your business idea out there for all to see, and people can back it. Anyone, literally anyone, can pledge funds to help you reach your goal. Crowdfunding is commonly used in the startup phase, but some platforms let you raise money for established businesses too.
It’s a bit like investing, only you’re getting thousands of different investors from all over the world. Plus, here’s the kicker, you don’t need to offer any equity in exchange. Some people give money to fund projects out of the kindness of their hearts without wanting anything in return. However, you could increase the likelihood of people pledging money by offering rewards.
These rewards can be anything you like. Many businesses will offer special discounts on products for people who help fund the idea. It could be a one-off discount, or an ongoing one. You can put levels to your rewards as well – set minimum amounts people have to donate to unlock rewards. The more they donate, the better rewards they get.
It’s a brilliant idea, but the hardest part is actually getting your business seen. You’ll compete against thousands of other ideas on crowdfunding platforms, so you really need a fantastic idea that grabs people’s attention and hooks them in.
To summarize, these four funding options help you raise money for your business without taking out a loan. Does this mean you shouldn’t get a business loan? No, but it means you could get a much smaller one that’s easier to manage and can be paid off quickly. The moral of the story is you need to consider all the different funding options to help your business thrive.