Effective founders rely on startup capital to fuel business growth. Explore the most popular funding sources.
Board fundraising provides the primary source of capital for a startup organization. The resulting funds help an early-stage business grow and thrive in the industry.
However, it’s common for a startup board to lack a concrete fundraising approach, maybe because of unawareness of great sources of capital for startups or members not discussing fundraising in board meetings.
We researched the best funding sources for startups and created a list of the most popular ones for early-stage businesses like yours. Use the following tips to make informed decisions when raising startup capital.
How to Raise Startup Capital
Startup capital refers to the money a new company raises to meet the costs of entering or thriving in the industry. The capital comes in many forms, including loans and investments. The amount required is typically significant in order to cover inventory, office space, and product development costs.
Every startup needs to raise capital, even if your business is currently stable in the industry. The reasons?
- Raising capital helps your business scale faster. Bootstrapped money and scattered small business loans allow you to launch a business and remain stable. But when it’s a matter of scale fast or get out of the industry (due to stiff competition), you’ll need more significant sources of funds.
- Raising capital taps into resources beyond money. Let’s say you apply for an incubator program from a popular venture capital firm. The cash you get is accompanied by business expertise and reliable industry networking that helps your startup succeed.
How you should raise capital depends on your business idea, access to funding, and background. Follow these basic steps to obtaining funds from external sources.
1. Determine Your Financial Health
You must know where you stand financially to determine if you qualify for funding programs and understand the capital you need. To check your financial health, look into your business documents, including bank statements, tax returns, revenue projections, and profit and loss statements.
2. Calculate the Amount of Capital Your Business Needs
You must know the amount you need to identify the capital source that best suits your business. The amount depends on your goals and financial obligations.
3. Create a Detailed Business Plan
Lenders and investors will want to see a detailed business plan before providing business loans or venture capital funding. The plan helps you showcase your business idea to potential funders. A detailed plan includes your financial summary, required funding, target market, strategies, and leadership matrix.
4. Research Your Options
In this step, identify several capital sources. Then, narrow down to the best option based on the amount you need, your eligibility for the capital source, and the pros and cons of different funding options. The following are the top 5 funding sources for your business.
5 Common Funding Sources for Startups
There are dozens of ways to raise capital for startups. Read on for 5 of the most common ones you can leverage.
1. Small Business Association (SBA) Loans
SBA loans are government-backed funding for early-stage and small businesses. The U.S government acts as a guarantor for startups (through the SBA agency) to reduce lenders’ risk. As a result, SBA-approved lenders can fearlessly give business loans, making it easy for startups to access capital.
SBA loans include:
- 504 Loans: Provide funds of up to $5 million for fixed assets. You can access this loan only if you meet specific SBA qualifications, including operating as a for-profit company in the U.S. and having a tangible net worth of less than $15 million.
- 7 (a) Loans: Offer up to $5 million of working capital. It’s the best option when purchasing real estate, but can also be used for working capital, refinancing business debt, and to purchase furniture, fixtures, and supplies. Eligibility depends on operations, credit history, and demonstrated need.
- Microloans: Equip small businesses with up to $50,000 through SBA funding intermediaries. They’re best used when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. They cannot be used to pay debt or purchase real estate. Eligibility requirements vary depending on the intermediary lender, but typically require collateral and a personal guarantee of the business owner.
Any business that qualifies for an SBA loan can apply online.
2. Venture Capital (VC)
Venture capital firms provide funds to startups with significant growth potential in the industry. For this reason, you can access venture capital even if you have little or no track record in the industry.
VC capital is a form of equity financing. Depending on the venture capital amount, you sell a part of your business. In return, you get capital funds, technical support, business expertise, and industry networking to help you take your business to the next level.
3. Angel Investors
Angel investors are private associations or individuals who fund startup companies in exchange for partial ownership in the form of royalties or equity. These investors can fund an established business or a startup with a potentially lucrative idea. Therefore, any startup can benefit from angel investors.
To find an angel investor, focus on geographically close investors. That’s because angel investors prefer to play an active role in the startups they fund. Alternatively, approach angel organizations like Angel Capital Association (ACA).
As the name suggests, crowdfunding refers to generating capital from many people to fund your startup. Depending on the crowdfunding type, people can either donate funds in one pool out of goodwill or get rewards like equity in the company raising the money.
Any startup can leverage crowdfunding to raise startup funds on online platforms like Indiegogo, Kickstarter, SeedInvest, and GoFundMe. Running successful crowdfunding campaigns requires patience, persistence, and best practices.
Grants are financial awards from an organization or government. Essentially, grants are gifts, which is to say you can use them to generate capital without worrying about debt. Grant organizations set the eligibility standards. Any business that meets the standards may apply for the grant.
When applying for grants, you face stiff competition from similar startups. Ensure you identify what sets you apart from competitors and use it as an advantage in your applications. Organizations like Cisco, Lyft, and Twilio.org offer grants to businesses.
Power Your Startup Board With OnBoard
Raising startup capital requires drive, competitiveness, know-how, and organization. A board portal platform helps boards host smarter fundraising meetings, track tasks, and store financial documents.
About The Author
- At OnBoard, we believe board meetings should be informed, effective, and uncomplicated. That’s why we give boards and leadership teams an elegant solution that simplifies governance. With customers in higher education, nonprofit, health care systems, government, and corporate enterprise business, OnBoard is the leading board management provider.
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