Startup Financing: 6 Ways to Fund Your Startup

Startup Financing: 6 Ways to Fund Your Startup 1

You bring your incredible business idea to life, manage to achieve sustainable growth, eventually sell your startup for a pretty penny, retire on a nice beach somewhere, and then you wake up. Things don’t turn out like that very easily in the real world. You need to invest a lot of time and resources in building your startup before you can start dreaming of that permanent vacation. 

No matter how good of an idea an entrepreneur has, if they fail to get their business off the ground, that idea isn’t going to see the light of day. Being able to raise funding for a startup is perhaps one of the most difficult things that an entrepreneur has to do. Even though it may seem like there’s no shortage of money being thrown into startups, getting a piece of that pie for yourself is easier said than done. 

For starters, your idea may not be tech-based, so it would be difficult to tap into the venture capitalist or angel investor gravy train. If it is, you’ll find them to be largely dismissive because everything that can be pitched has probably already been pitched to them, or being tough and shrewd negotiators to get their proverbial pound of flesh if they see value in your idea. 

Be that as it may, those aren’t the only options you have to fund your startup. Here are 6 ways that you can raise funds to bring your idea to life. 

  1. Crowdfunding

The start of modern day crowdfunding can be traced back to 1997 when a British rock band called Marillion asked fans to make online donations to fund their reunion tour. Crowdfunding has since evolved into a legitimate source of fundraising for startups, provided that they’re able to market it online effectively. 

You’ll be surprised to know that the most amount of funds raised by a campaign on Kickstarter, a leading crowdfunding platform, is not by a tech startup but by fantasy writer Brandon Sanderson. He wanted to raise $1 million to self-publish four novels that he wrote during the pandemic but ended up raising $20.8 million from 84,600 backers in only three days. The previous record was held by the Pebble smartwatch which raised $20.3 million back in 2015.

Indiegogo and Patreon are other leading platforms that startups can use for crowdfunding. You must deliver what you promise to those who back the campaign. This could either be a product or a perk. Storytelling and effective social media marketing are key aspects of successful crowdfunding campaigns. Consider crowdfunding if it works for your idea since it has the added benefit of not requiring you to give up equity or make interest payments if you opted for a loan instead.

  1. Friends and Family

This is perhaps one of the oldest ways to raise funds to start a business. It’s also the first option that a lot of entrepreneurs consider when they’re starting out. It would usually take less of an effort to convince friends and family to invest in the business as compared to professional investors or banks. People in your circle could be more receptive to the idea and may also be willing to believe in your vision. 

You could ask them for a loan that needs to be repaid after a certain period of time or give them equity in the company in exchange for the funds that they provide. Either way, it’s important to structure them as business transactions, like you would with outside investors. 

Take appropriate legal advice and draw up contracts that include legal protections for both parties. That might help prevent your relationships from turning sour even if the startup fails to take off.

  1. Use Recurring Revenue for Capital with Pipe

If you have an established startup with recurring revenue streams, you can tap into a very unique way to fund your startup for further growth without needing to dilute or ownership by taking on external capital or even having to take out a loan. You can simply use your recurring revenue for capital.

Pipe is a platform that allows startups to convert their recurring revenue into upfront capital. All of this happens with the click of a button with instant payout. This is incredibly helpful for scaling companies. The platform pairs startups with investors, which comprise vetted financial institutions and banks, on a marketplace. They provide the upfront capital by paying a discounted rate for the annual value of the recurring contracts. 

Since its public launch in June 2020, more than 4,000 companies have signed up for the Pipe trading platform. The tradable annual recurring revenue on the platform is close to $2 billion. It’s not just SaaS companies that can raise non-dilutive capital through the platform. Pipe also offers it for D2C companies with subscription plans, property management companies, insurance brokerages, and others.

  1. Small Business Credit Cards

Banks and financial institutions offer a plethora of credit card products for small businesses. They even offer perks such as travel rewards and cashback to entice entrepreneurs who may be willing to sign up for a card. This is a viable source to fund your startup with but one that will require extreme diligence on your part.

Banks generally have strict requirements that the business owner has to meet before they can get the card. It would likely be tied to their personal credit score and they may even be asked to provide a personal guarantee. This would put you in a spot of bother should you make late payments or worse, be in default, as it would hit your personal credit rating.

Small business credit cards tend to have high interest rates, often as high as 20%, so if you’re unable to pay the balance in full at the end of the billing cycle, the cost of capital through this source can rise exponentially. This situation can quickly slowball and leave you in a position where you’re unable to raise more funds and end up significantly damaging your personal credit history. 

Ideally, the revenue from your startup should be stable enough that it enables you to meet, partly even if not fully, the liabilities that will arise from using a business credit card. As long as it’s managed at a reasonable level, this can be a useful source of instant funding that even provides some decent rewards. 

  1. Small Business Loans

Conventional banks and alternative lenders both provide small business loans provided that the borrower is able to meet their requirements. For new startups, they’ll likely want to see a full business plan to understand the viability and feasibility of the business before they decide on the application. It’s a bit easier for established businesses to obtain a loan since they are able to provide a more accurate picture of their financial position.

These are some of the most suitable types of small business loans for startups:

  • SBA Loans

SBA loans are guaranteed by the US Small Business Administration and because of that, they’re more accessible to new startups. The repayment terms and interest rates are also more favorable. You can borrow up to $5 million as long as your small business meets the eligibility requirements.

  • Business Line of Credit

A revolving line of credit provides instant access to funds once approved by the lender. You can access the funds when required and be only charged interest for the amounts withdrawn. It’s a great option to meet unexpected expenses and manage cash flow.

  • Working Capital Loans

Startups can utilize a working capital loan to finance daily operations. This is a debt borrowing vehicle useful to manage unpredictable revenues and expenses until stability returns. Working capital loans can be unsecured but for startups that have little or no credit history at all, lenders will typically require some collateral for the loan and possibly a personal guarantee as well.

  1. Startup Incubators

Startup incubators rarely take equity if they’re not providing funding as their primary focus is on incubating and maturing startups so that they can get into accelerator programs. Networking is also an area of focus as the incubators provide startups with a platform through which they have access to investors that may be interested in providing funding.

The duration of incubation can vary but it’s generally up to one year. Startups receive mentorship and office space so that they’re able to build a minimum viable product which is then able to attract investors. Some incubators may also link startups with angel investors who are looking for early stage companies to invest in.

Startups that want to make the most of their incubator experience should be receptive to the advice of experts that are running the incubator. That may require making major changes to the business model or even pivoting the entire startup. The founder’s vision is important but so is the advice from the experts that have the knowledge and experience that startups can capitalize on to build a solid business.

If you can, bootstrap it!

It’s not impossible to start a business without raising external funding. Plenty of people have done it. Most startups tend to be self-funded or bootstrapped. Experts suggest that up to 85% of startups use some form of bootstrapping to get their business off the ground. 

This might require you to save money over a period of time before launching and might also slow down growth. On the other hand, the advantage is that you maintain full ownership and don’t have any financial liabilities with lenders. 

Regardless of whichever way you choose to fund your startup, remember that transforming it into a sustainable business will require focus, commitment, and grit. Good luck!

Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Axios, TechCrunch and VentureBeat.

Written by Andrew Gazdecki

Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes, Wall Street Journal, and Entrepreneur Magazine, as well as prominent industry blogs such as Axios, TechCrunch and VentureBeat.

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