In the US, the issue of small business startup finance is of high importance. This is particularly due to the higher failure rate of small businesses compared to that of larger firms.
Most failures of small businesses are caused by a lack of available capital; bad business planning results in overspending of the available capital.
Just to give you an idea of what I am talking about, over 80% of businesses fail because of a lack of funds. Within the first year, about 20% of small businesses don’t make it, and by the fifth year, half of them have closed down.
Starting a business startup is filled with uncertainty and adventure. It is an often stressful period of time as the business owner has left the security of a previous employer and has embarked on their own.
And there are two critical areas that are in the minds of all business owners: securing funds for the start-up and then successfully managing those funds to ensure their business does not fail.
7 Ways to Raise Funds for Your Business Startup in the United States
Here are 7 important ways to raise enough funds for your business startup in America:
1. Crowdfunding
Crowdfunding is one of the more innovative methods for raising funds for a startup because it enables entrepreneurs to take advantage of the vast connectivity and reach of the internet.
Crowdfunding happens when an entrepreneur puts detailed information about his business on a crowdfunding platform site and then uses the platform and various social media to attract potential investors and customers to the venture.
If enough people believe in the cause, the entrepreneur can hit his funding goal. If the campaign falls short, the entrepreneur gets nothing, and the investors are not charged.
The big advantage of crowdfunding is that it allows a new business to garner interest in their product while simultaneously raising money. If the crowdfunding campaign is particularly successful, it can provide a small business with the capital it needs to launch, all while cutting out loans and not giving up any equity.
This method can be effective if the product is innovative and has the potential to go viral, but even small businesses can benefit from the increased exposure.
2. Angel investors
Angel investors provide the finances for business start-up costs, and in exchange, they will take equity in the form of stock in the company. Angel investors are often retired executives or entrepreneurs who may be interested in angel investing to pass on a legacy of knowledge.
They may want to stay active in the business community, or they may want to try their hand at investing. Angel investors can provide a valuable mentor relationship for the entrepreneur since they want to see the business succeed.
They will often take a seat on the board of directors. In terms of funding, most provide in the range of $250,000 to $2 million. The cost to the angel investor is the equity in the business, which is usually in the range of 10-50%.
To attract angel investment, it is generally advised that the business has a strong management team, a clear business plan, a competitive product in a large market, and a strong intention of giving the investor an exit strategy, usually to take place in the range of 3-8 years.
3. Venture capital
Venture capital is a type of private equity and a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential or that have demonstrated high growth. Venture capital can also include managerial and technical expertise, as well as equity financing.
Venture capital firms are typically comprised of small teams with technology backgrounds (in science, engineering, IT, etc.) or those with business backgrounds.
An important need for companies that require venture capital is the development of innovative products or services for the market. These companies must also have a clear and realistic approach to creating and selling their products or services.
A venture capitalist is a person who makes a living by investing in innovative companies and providing the capital for these companies to start, while expecting the company to succeed and make a large return on investment.
4. Small business loans
Small business loans are an option for startups or existing companies that need a loan with flexible terms. This type of business loan could be provided to all types of established businesses.
The main condition is that the business should have annual sales and a length of time in business that usually have to be met in order to become eligible for the small business loan.
Small business loans are typically made through banks and credit unions. They can also be made through private investors or public venture capital funds. These loans are usually difficult to obtain, but they have a number of benefits.
They can help broaden the company and serve as a source of investment capital. A business is able to use it to leverage new types of financing, possibly equity, or to increase stock.
5. Bootstrapping
Entrepreneurs who travel the path of bootstrapping are those who come up with the capital necessary to launch their enterprise from essentially their own back pocket. The term “bootstrapping” is derived from the popular expression “to pull oneself up by his bootstraps”.
Similarly, businessmen who are bootstrapping are attempting to launch their company without external investment, instead using their personal savings to fund their venture. One of the primary advantages of bootstrapping is that it can give your business much-needed credibility with investors and lenders.
If you show that you were able to take your business from start-up to a point where it is ready to launch while using little to no external funding, it is evidence that you are able to effectively manage your resources.
Bootstrapping is a sign of commitment from business owners; they are often willing to forgo a steady income to use their own money to develop their product for the market. It also makes companies more attractive to investors by showing a method of self-sustainability that will give them confidence that you can achieve the same when using their money.
This method of raising funds can be very risky and could take a long period of time, but if done correctly, it can be a very efficient way of financing your business.
6. Personal Savings and Friends/Family Contributions
Both personal savings and friends/family contributions are the most effective single source of money for starting a business.
The entrepreneur is in a better position to secure funds from this source because he is capable of negotiating the terms of the loan, and he will know what the implications of the loan will be upon his personal and business assets.
They are also the only sources that will provide funds that do not need to be paid back to the contributors. Furthermore, they are the only sources for which there are no legal complications involving securities laws.
But, remember, despite these advantages, one must carefully consider the impact of loans or investments from friends and family, as the possibility of damaged relationships can be sweeter than any low-interest-rate loan offer.
The entrepreneur should figure out the relative importance of the relationship in question, and under no circumstances should he consider accepting friends/family contributions with high opportunity costs in other areas.
An example would be accepting money from a family member who is close to retirement but has not save enough.
7. Grants
Grants might be a very feasible option when raising funds for your business startup costs. There are a variety of public and private institutions that offer grant to new and expanding businesses for specific purposes.
Typically, grants do not need to be repaid and may be the ideal way to start your company. The only downside to grants is that they are often very competitive, with so many people and businesses vying for the same funds.
A good place to start is the U.S. Small Business Administration. However, don’t set your sights here since there are fewer grants and higher competition here than at the private institutions.
Another good resource is contacting Small Business Development Centers (SBDC’s) who have a good pulse on what companies and what types of businesses are being favored to stimulate the economy.
If you are awarded a grant, be prepared to wait several months to a year to actually receive the funds. This is usually still worth the wait since you aren’t getting money that you have to pay back.
Conclusion: Ways to Raise Funds for Your Business Startup in the United States
Starting a business by yourself can be a very difficult but rewarding experience. Everyone fears failure, but while there is a chance of failure, there is also a chance for success. It’s up to you to decide what’s right for you, but keep in mind that you don’t have to do it alone.
Oftentimes, those who have the drive and determination to start their own business have great ideas but don’t know how to implement them. There is no shame in looking for help. It is said that those who are successful are those who are willing to ask for help. And the U.S. has many resources available for those who are willing to seek them out.
Any of the ideas listed in this paper can turn your dream into a reality. So if you have a great idea and the determination to follow through with it, then starting your own business may be a viable option.