When scaling a business, you’ll inevitably face the question of how you’ll finance the growth needs of the business over time. Depending on your circumstances and funding requirements, you might choose to bootstrap, or self-fund, your business. Or, like so many other business owners, you might decide to seek funding from an external source. External funding can be a beneficial option if you need higher levels of capital to jumpstart your business, want to mitigate the financial risks involved, or want access to resources beyond just a cash infusion.
Find an overview of the pros and cons of bootstrapping vs. seeking funding here.
The financing landscape has many options, each of which you should consider in line with your business needs. Let’s explore some of the most common funding options for startups and what you can expect.
What funding options do I have for my startup?
1. Take out a small business loan
One of the most common routes entrepreneurs take to fund their ventures is securing a small business loan from a financial institution. You can learn about the specific types of loans available to you as well as find a lender in your area through the Small Business Administration’s website. Note that not all businesses are eligible for business loans and your ability to secure a loan for the amount you need is dependent on multiple factors, like business profitability, years in business, existing debt, and reliability of income generation, to name a few.
2. Access venture capital
Investors known as venture capitalists provide funding to early-stage, high-potential companies in exchange for equity in the company. These VC firms can also offer crucial strategic guidance and can help establish your senior leadership team and/or board of advisors to support you with the expertise to help your business succeed.
Pursuing VC funding may seem daunting, but there are helpful resources out there to get you started. Visit the National Venture Capital Association’s website (if you’re in the U.S.) or Invest Europe (if you’re in Europe) to learn more about the process.
3. Pitch to an angel investor
While venture capital funding means working with an institutional firm, an angel investor is an individual who chooses to invest their own money directly into a business. An angel investor might operate alone or with other angel investors to provide capital to early-stage businesses. However, the amount of capital invested by an individual angel investor tends to be less than that of a VC firm. Also, whereas VC funding also comes with strategic guidance, angel investors primarily provide financial support — though they might connect you with useful contacts.
Learn how to create a compelling pitch deck to support your fundraising goals here.
4. Use crowdfunding
You may have contributed to a Kickstarter or Indiegogo campaign in the past, helping support a friend’s creative project or an acquaintance’s business venture. These platforms allow early entrepreneurs to raise funds from a large number of people, usually their personal and professional network. If you choose to go this route, you might offer contributors equity in your business, early access to your product, or another kind of incentive.
5. Seek a grant
There are many government, private-foundation, and industry-specific grants available to you that can help you fund your venture. You can start your search with the U.S. Small Business Administration’s grants page here, as well as leveraging this article from the U.S. Chamber of Commerce. Grants are a great way to fund your business, but keep in mind that application processes can be very competitive.
Remember: you’re not limited to one type of funding vehicle! Entrepreneurs often combine multiple funding sources to meet their financial needs. A mix of personal savings, loans, angel investments, and grants could be the most effective strategy for your unique situation, especially as an early entrepreneur.
What can I expect after I secure funding for my startup?
Now that we’ve covered some of the different types of funding options, let’s delve into what you can expect once you receive funding. Injecting capital into your venture comes with plenty of obvious benefits, but there are other considerations to keep in mind.
Pro: External funding may help you grow your business more quickly.
With your newfound capital, you can devote more resources to growth initiatives like large-scale marketing efforts, market research, product development, growing your team, and expanding your operations. These efforts can mean faster market penetration and growth. With access to a larger budget, you’ll be more able to scale your business at a faster pace.
Con: You might no longer be in complete control of your business.
If you choose to bring on investors, you gain capital and expertise, but you may relinquish some control of your business. Often by securing investor funds, you’ll also agree to share decision-making powers with them. Your investors may have ideas and expectations that are at odds with yours, and you’ll have to find ways to compromise and share control.
Pro: You can now access a helpful network of partners and their expertise.
Investors bring in much more than just financial support: They often possess industry experience, a network of helpful connections, and valuable insights that can help you navigate the challenges of growing a business. This access to a network of mentors and advisors can offer you invaluable guidance throughout your entrepreneurial journey and help you unlock new opportunities and levels of success.
Con: You might face external pressure about growing and scaling your business.
Investors expect a return on their investment, which can create expectations and pressure about growth targets and timelines. Your vision for your business or your preferred pace might be at odds with what your investors expect – this can be a challenging balancing act.
Pro: You’re not solely responsible for your business’ finances.
Once you bring on investors, they share in both the upside and downside risk of your business . As a result, you avoid some personal financial risks that you would otherwise absorb if you were only funding your venture from sources like your own savings or credit.
Con: Your ownership of your business may be diluted.
When you seek investor funding, you often give up some of your ownership in the business. This means you may have a smaller ownership stake in your business and be obligated to share profits with your investors.
Pro: You can grow your business’ visibility and credibility.
Whether you raise capital through crowdfunding or secure funds from an angel investor, you can position yourbrand’s visibility for greater awareness. Investor support will lend your business credibility, as it’ll be seen as a vote of confidence in the venture’s potential. This might attract investments from members of your investors’ network or broaden your network.
Con: You may experience less privacy.
Investors will likely request access to sensitive business information like operational details, business plans and financial reports. This could be an unfavorable consequence of external funding if you prefer more privacy around your business strategy and finances.
Understanding the diverse funding landscape can seem cumbersome, but being thorough in your research and preparation, and anticipating the results of seeking and securing funding, you’ll be able to navigate the process much more seamlessly. And, equipped with the funding your venture needs to be successful, you’ll be in a position to foster greater growth outcomes for your business and provide value to your customers.
Based on the options listed above, which funding option(s) align best with your business goals and requirements, and why? Share with us in the comments!
