6 Financing Options For New Entrepreneurs

Starting any business can be challenging, but the quick growth and turnaround times commonly associated with entrepreneurial ventures come with their own particular set of challenges. You’re entering a fast-paced and cutthroat segment of the economy with both high risks and high rewards. To start your journey as an entrepreneur, you’ll need to take stock of your financing options.

If your business plan prominently features explosive growth, a liquidity-rich exit strategy, or even an initial public offering (IPO) within five years or so, keep reading to learn more financing options available to entrepreneurs.

What Are Financial Challenges For Entrepreneurs?

Entrepreneurs face a few serious obstacles to getting funded, with the biggest issue being risk.

Unfortunately, over 50% of startups fail. Traditional lenders see this high level of risk and are less willing to lend to new entrepreneurs. This means that you will have a smaller pool of lenders than is available to established businesses right from the start.

An additional hurdle is that bank consolidation has resulted in fewer traditional lenders, which means fewer funding opportunities. The loss of community banks, in particular, has negatively impacted lending. Online lenders have partially stepped into the void of loans for startups, but many are focused on very short-term lending.

In particular, the high-growth startup model (though much romanticized in the media) is rarer than you might think. Fewer than 1% of businesses successfully raise venture capital.

Finally, social barriers ranging from prejudiced lending practices to geographic concentration of resources can greatly affect your chances of getting financing.

That said, “difficult” doesn’t mean “impossible.”

With some creativity, diligence, and relationship-building, you’ll have a good shot at overcoming the odds.

What Are The Sources Of Financing Entrepreneurs Use For Their New Businesses?

Now that we’ve gotten the cautionary tales out of the way, it’s time to look at some types of funding entrepreneurs can use for their new businesses.

Venture Capital

Venture capital is a funding source that most people associate with entrepreneurship.  Venture capital firms pool money from sources ranging from wealthy individuals to banks to pension funds. Each firm tends to specialize in a particular industry or type of company. Once they’ve raised an agreed-upon amount, they’ll shop around for businesses in which to invest.

A venture capital fund frequently disburses its funding over several “rounds,” starting with the seed round and rolling into successive rounds (also called a series). Those rounds include:

• Seed round: As the name implies, this funding is meant to get your business off the ground.
• Series A funding: This funding is typically used to scale up a business that is already offering a product and has a customer base.
• Series B funding: Similar to Series A funding, this round is also focused on growth.
• Series C funding: This round focuses on helping mature companies expand into new products or acquire other companies.

Different venture capital firms tend to specialize in specific phases.

Angel Investors

Though sometimes used interchangeably with venture capitalists in casual conversation, angel investors aren’t quite the same thing. Whereas venture capital usually involves a firm aggregating funds from multiple sources, an angel investor is an individual — one who is typically wealthy — who is looking for a risky venture with a potentially high rate of return. Like a venture capital firm, an angel investor is usually looking for equity in your company in exchange for funds.

While word-of-mouth is still a common way to get hooked up with an angel investor, over the past decade or so there have been attempts to form networks of investors through hubs like AngelList. Some angel investors even pool their resources and function like a venture capital firm.

Debt Financing

Debt financing includes financial products like bank loans, microloans, online loans, and personal loans. While there are advantages and disadvantages to each of these, in the end, we’re still talking about taking on and servicing debt in exchange for a lump sum of cash.

While it’s difficult to get a loan before you’ve established a steady source of income, it’s not impossible, particularly where programs like microloans are concerned. These programs provide relatively small amounts of money with reasonable interest rates and long-term lengths that can give you enough time to get your business up and running.

Bootstrapping

One strategy to consider is to use your savings and resources instead of using outside sources for capital. This strategy typically requires taking a lean, minimalist approach to your business operations. When you do hit a growth phase, it’ll be funded by your business’s revenue.

Crowdfunding

Among the newer ways to get a startup off the ground is to crowdfund it. Crowdfunding is typically associated with pre-purchasing products, but some newer services are offering so-called “equity crowdfunding.” As the name implies, you’ll be giving up some equity in your company in exchange for funding from a pool of investors.

Grants & Subsidies

Most parts of the country have programs in place designed to encourage entrepreneurship. These can take the form of tax incentives, subsidies, grants, or some kind of infrastructural support. You should familiarize yourself with the ones that apply to your type of business and take advantage of them when you can.

Entrepreneur Financing Tips From The Experts

What better source of advice is there than people who have successfully undertaken the same journey you’re about to attempt?

Make Sure An Angel Investment Is What You Want

Entrepreneur Tim Berry, founder of Palo Alto Software and bplans.com, cautions founders to make sure they need and want angel investment before seeking it out. If you don’t need it, you’re better off without it.

Believe In Your Vision

In an episode of The Jordan Harbinger Show, angel investor Jason Calacanis says he can tell when entrepreneurs believe in their vision and when they’re bluffing, a skill he compares to playing poker.

Getting A VC Firm’s Attention Is Part Of The Interview

Marc Andreessen, co-founder of VC firm Andreessen Horowitz, says that a founder’s ability to network their way into a meeting with a venture capital firm is a good barometer for their ability to forge other important business relationships, such as those with customers, suppliers, and even the media.

Understand The Motivations Of Your Potential Investors

Scott Kupor, author of Secret of Sand Hill Road, advises founders to consider what an investor is hoping to get out of their relationship with the startup. The right investor will be the one whose objectives align with your own.

Get Started On Your Entrepreneur Financing Journey

You had your vision in place. Now you have a sense of how you might finance it. If the odds seem daunting, remember that the rewards are also great.

None of these options sound appealing? If you’re looking to finance smaller, short-term expenses for your business, you’ll want to take a look at our top business credit card options for startups.