When the average person imagines an entrepreneur, they likely envision the most popular and successful thought leaders of our time—Steve Jobs, Elon Musk, and other visionaries that have redefined our culture. They don’t image the entrepreneur as a cash-strapped professional sweating over spreadsheets and laying awake at night wondering what the next day will bring.
Nevertheless, this is the reality for every startup owner in the early stages of business growth. Entrepreneurship is unpredictable, and none of us have the bottomless pockets to handle every problem that comes up. As such, startup owners need to think long-term and carefully assess which financing options will give them the best chances of success. So, which type of financing is right for your startup?
First on the list is the popular equity financing: Investors providing funds in exchange for shares. This option is great from a repayment standpoint, as entrepreneurs aren’t taking out loans—the risk lies with the investor. However, entrepreneurs will have to give up part of their business for the privilege.
Startup owners should be cautious before signing on to equity financing. Outside investment may be tempting, particularly when times are tight, but some entrepreneurs sign deals they end up regretting later down the road.
Angel investment is similar to equity financing, with size being the key differentiator. Angel investments are typically made by smaller shops or even single individuals. The advantages of this option are the significant cash infusion and mentorship that come along with these arrangements, although these individuals typically demand higher levels of equity before investing.
Naturally, small business loans are an option to any startup owner who qualifies. And while loan standards have become stricter over the past few years, it’s still a viable option. Different lenders offer different terms and funding packages (such as microloans) that may be ideal for growing startups.
Another option available to business owners is securing a loan through an SBA network. These arrangements involve the entrepreneur receiving a commercial loan through a bank (or authorized SBA lender) structured with specific terms set by the SBA provider. This strategy protects the lenders by creating a buffer should the entrepreneur default on the loan. Per the SBA arrangement, the network will pay back a portion of the loan to the lender. This additional security can help entrepreneurs secure funding, even if they don’t qualify for traditional business loans.
Rollover for business startups (ROBS) is a funding option that involves dipping into retirement accounts, such as an IRA or 401(k), and leveraging those funds for business use. It isn't a loan or a withdrawal, as explained in this post by FitSmallBusiness.com, but instead is a clever way to tap into your retirement funds early.
While this option is only suitable for entrepreneurs who already have robust retirement portfolios (typically $50k+), it’s an effective way to generate funding without relying on outside loans. Plus, this is a rare example of a strategy that lets entrepreneurs cash in retirement funds early without paying those stiff early withdrawal penalties.
If funds are needed, why not crowdsource? This can be an ideal funding option for both emerging startups and startups that already have existing fanbases. Websites like Kickstarter and Indiegogo have exploded in popularity for their ability to help users secure funding for various projects, and the same can apply to a struggling startup. Note that crowdfunding strategies typically apply to one-off projects or specific project milestones wherein users receive a benefit in exchange for their donation. This makes crowdsourcing a great supplementary funding source, but it’s not a long-term strategy.
Credit cards are a common source of business financing for startups of all sizes. It’s simple enough to extend additional lines of credit for business use, and the terms can be surprisingly favorable. But be cautious before jumping headfirst into this strategy. Business owners should research various cards, rates, and providers before committing themselves to an
Another option (though it may be a tough pill to swallow) is to ask for personal loans from friends or family. While the viability of this option certainly depends on who’s in the entrepreneur’s personal network, it can be an easy way to generate funding to help reach specific business goals.
Navigating Complex Financing Options
With so many financing options available to small business owners (many of whom lack financial experience!) it’s no surprise that so many entrepreneurs struggle with the process. Third-party financial experts can help entrepreneurs develop a solid financing strategy to support them in the long-term. Check out our post on Financial statement techniques to continue getting the lay of the land with finance management!