For every massive corporation, there’s a former small business that was operating out of someone’s garage. So what’s the difference between these success stories and their less fortunate competitors? In many cases, the startups best positioned to do well are those that can secure reliable access to funding.
The good news is that there’s no shortage of possible funding sources for your small business. In this article, we’ll discuss 6 different ways that you can fund your business in 2020 and beyond.
1. Personal connections
Unsurprisingly, one of the strongest sources of funds for startups is the owner’s personal network. Your close relationships are often the easiest to pitch to, since they already have a positive opinion of you and they’re more likely to be familiar with your business plan and work ethic.
According to a study by Bank of America, 38 percent of small business owners say they’ve received financial gifts and/or loans from their friends and family. 76 percent, meanwhile, say they’ve invested some or all of their personal savings into the business.
If you have a catchy, high-concept business plan that’s likely to go viral, or that fills a real gap in the market, another option is to crowdfund your startup on platforms such as Kickstarter and GoFundMe.
To do so, you’ll need to know how to set your project up for success: for example, setting a realistic funding goal and coming up with good reward tiers. In addition, you’ll also need to be skilled at self-promotion through strong copywriting and video marketing (Having a large social network helps too).
3. SBA loans
Beyond your personal and social networks, the next sensible place to turn is a small business loan. The U.S. Small Business Administration (SBA), which offers support and advice to the country’s small businesses, offers an SBA loan program for viable startups.
The SBA acts as an intermediary between lenders and your business, helping you secure access to capital more easily. SBA 7(a) loans have low interest rates, which makes them an attractive prospect for businesses looking to hire more employees or expand into a new location.
4. Angel investors
Angel investors are individuals who are looking to make smart investments by getting in on the ground floor, exchanging capital in return for equity in the business. These people are often the next place to turn after your startup has acquired some momentum and appears like a viable prospect for investment.
Because angel investors don’t have to be repaid in the event that your business fails, they represent an appealing alternative to small business loans. Many angel investors are also experienced businesspeople themselves, and can serve as mentors to help you navigate the choppy waters ahead. The disadvantage of angel investors, however, is that you relinquish some degree of control over your business.
5. Venture capital
Venture capital is a form of private equity in which investors exchange funding for an equity stake in the business. Unlike angel investors, venture capitalists are investing other people’s money, which is held within a pool or fund. Some businesses go through multiple rounds of venture capital, from seed funding to Series A, B, and C funding and beyond.
Also unlike angel investors, who generally focus on early-stage startups, venture capital firms prefer businesses with more maturity and stability. The pros and cons of venture capital are similar to those of angel investors: you gain a risk-free source of funding, but at the cost of giving up some of the ownership of your business.
6. Initial coin offering (ICO)
Initial coin offerings (ICOs) are a novel funding method that applies the concept of an IPO to the world of cryptocurrency. Businesses who are looking to raise money sell a token or coin to investors. These sales are recorded on a “blockchain,” an immutable ledger that serves as a transparent record of previous transactions.
The idea is that these tokens, while having no intrinsic value in themselves, can be exchanged for a good or service that your business promises to the buyers. Alternatively, buyers can sell these tokens to someone else, hoping to turn a profit.
ICOs are relatively new and require in-depth technical expertise with cryptocurrencies and the blockchain, which makes them high-risk for both you and your customers. Still, ICOs can be a promising source of funding for businesses with a compelling story and an entrepreneurial spirit.