Embarking on a startup journey is no easy feat. Especially when it comes to securing funding to grow your business. Determining which type of startup funding is best for your startup often begins with understanding the stage of your startup, your goals, and your finances.
To help you make sense of it all, we’ve put together a list of the 6 most common sources of startup funding. Which will benefit you the most?
1. Venture Debt
Venture debt is often provided as a loan through a bank or specialty lending firm and is perfect for companies that have strong revenue performances over a long period of time.
While the loan does need to be repaid, one of the biggest benefits of venture debt is that there is typically no equity dilution associated. So you get the money and you get to keep primary ownership over your business. It’s a win-win.
Another reason venture debt is a substantial source of startup funding is that it offers greater flexibility, allowing you to:
- Meet projected goals
- Fund a variety of business needs
- Handle unexpected growth and other unforeseen circumstances
To dive deeper, check out our video detailing the nuances between venture debt and venture capital.
2. Venture Capital
Venture Capital is a common source of startup funding. Investors will request an equity stake in your business in exchange for capital to help make your idea come to life. Investors who take the risk with their money on these unproven ideas can potentially earn significant profits if the business succeeds.
This capital is often leveraged as funding for the Seed Stage, Start-up Stage, First Stage, and Expansion Stage of a new business.
3. Angel Investors
Startups that are in their early growth stages benefit most from angel investors. Why? Most venture capital firms and banks are hesitant to invest in early stage startups as there is a higher level of risk involved. In fact, within the first year, 10% of startups fail.
Yet, angel investors are typically wealthy individuals who believe in the potential of a startup and will provide financial backing for equity in the business. So, what is angel investment good for? This form of startup funding enables young businesses to cover foundational expenses, including product development, hiring, and marketing.
4. Crowdfunding
Crowdfunding occurs when a substantial number of people band together to raise money for your product or business. With donation-based crowdfunding, everyone who participates in the raise offers small investments from the kindness of their own hearts.
The downside is crowdfunding can take a long time to drum up enough capital to make strides in your business. But every bit helps, right? The most common sources of donation-based crowdfunding include Kickstarter, GoFundMe, and Crowdfunding.com.
5. Government Grants
Another source of startup funding includes government grants. While these grants enable you to avoid repayment and no equity trade, they’re often extremely hard to find.
But if you are lucky enough to be granted supplemental money from the government to grow your startup, there are likely stipulations as to what you can do with the money. For example, depending on the type of grant you apply for, the money granted to you may only be used for hiring staff, developing your product, or some other restrictive use case.
6. Bank Loans
Bank loans are another great startup funding option. These loans offer flexible repayment terms, competitive interest rates, and the opportunity to build a positive credit history for your business.
Plus, they don’t require equity dilution. However, banks will scrutinize your finances before giving you a dime. This means you’ll need to prove to the bank that you’re able to repay the loan in the time allotted without any issues.
Banks will also want to see your future cash flow estimations to decide whether your startup is eligible for their specific loan. That said, it’s a good idea to shop around at multiple banks to secure a loan that has the best interest rate and terms for your business.
Final Thoughts
Navigating the diverse landscape of startup funding requires a thoughtful consideration of your business stage, current finances, and future goals. The 6 sources of startup funding we discussed in this article offer various advantages and considerations. Each option has its merits, and choosing the most suitable one involves aligning with your business's unique needs and growth trajectory.
If you need help to discern which funding option is right for your startup, get in touch with us. We can help you find a proper lender that fits your business needs and goals.