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Business

How to Fund Your Small Business: 7 Ways to Raise Startup Capital

Written by MasterClass

Last updated: Nov 8, 2020 • 5 min read

One of the biggest challenges of building a successful small business is simply finding the money to get started. The vast majority of new business ventures fail, and lack of capital is one of the major reasons. How much money you need to launch a business venture, and where you should get it, are important questions that every entrepreneur has to answer.

Legends abound about scrappy entrepreneurs maxing out personal credit cards to build a prototype in the family garage. That route may be possible for some businesses, but as a modern entrepreneur, you have a number of financing options to consider. Which ones are right for you will depend on your business and ambitions.

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7 Ways to Fund Your Business

Once you have a business plan in place and have sought out mentors—either within your network, through the local chamber of commerce, or via a small business development center established the Small Business Association (SBA)—you’re ready to begin thinking about funding options. Here are the seven ways you can raise capital for your new company:

  1. Self-funding: Also called bootstrapping, self-funding can be an effective way to start a small business, especially for first-time entrepreneurs who have trouble finding other sources of capital. There’s a significant risk to self-funding in that you’re entirely on the hook if the business fails. That said, you won’t have to worry about many of the formalities and compliance costs associated with raising outside capital because you’re just spending your own money. Additionally, if you do eventually seek other sources of business funding, the fact that you put your own money on the line can be attractive to investors who want to see that you’re committed to the success of your venture. There are many ways to self-fund a business, all of them risky. You can tap into your personal savings, open credit cards, or sell personal assets. If you own a home, you might also look into taking out a home equity line of credit (HELOC) to borrow against the value of your home.
  2. Friends and family: Borrowing money from friends and family is another way of raising money for a small business. Like self-funding, borrowing from friends and family has some advantages: It’s less formal and may be a quicker way to access capital than going through a bank, and people close to you are likely to be more flexible when it comes to interest rates and paying back loans. That said, there are risks associated with borrowing from friends and family. You’ll want to make sure that the people you’re borrowing from understand that they’re investing in a business that might not succeed. Be upfront about what it is they’re investing in: How are you spending their money? What say should they expect to have in your business decisions? The more professionally you treat the arrangement, the more likely you are to preserve the personal relationships if the business falters.
  3. Small business loans: Going to the local bank can be a viable route, especially if your business is going to have a brick-and-mortar presence in the community. If you go to your local bank, there are a few things to keep in mind. First, make sure your bank is really local. Local and community banks (not local branches of national banks) are more likely to be supportive of local businesses. Be prepared to offer collateral; as with self-financing, there are considerable risks here, but offering collateral will demonstrate to potential lenders that you’re serious about your business. Look for loans through the Small Business Association. SBA loans are backed by the federal government and offer more flexible repayment terms than standard bank loans.
  4. Crowdfunding: Over the last decade or so, crowdfunding sites like Kickstarter have become a popular and viable source of capital for many small businesses. Unlike most of the other options on this list, most crowdfunding sites are geared more toward funding individual projects—be they video games, movies, or gadgets—than businesses. A crowdfunding campaign can also be a valuable way to gauge interest and build marketing buzz around your business. Crowdfunding is part investment, part loan, and part pre-sale. Every crowdfunding platform works a little differently, so you’ll want to make sure you understand the rules of your chosen platform from the outset.
  5. Angel investors: Angel investors are individual investors who are looking to invest their own funds in new businesses, typically in exchange for equity. Angel investors tend to be successful business people themselves, and one of the advantages they can bring is experience in your chosen industry as well as potentially valuable contacts. Generally speaking, angel investors are a popular route for tech startups and other businesses looking for funding at a level higher than most friends and family can support but lower than most venture capital firms. If you decide to seek angel investment, you’ll want to be clear what you do (and don’t want) from your new partners. Different angel investors want different levels of involvement in the businesses they invest in, so you’ll want to make sure you’ve found someone who believes in your business and whom you feel comfortable involving in key decisions.
  6. Startup accelerators: Another increasingly common route for new startups is through incubators and accelerators. These are organizations dedicated to helping entrepreneurs develop their businesses while also connecting them to potential mentors and investors. In startup incubators and accelerators, would-be entrepreneurs apply to join a class of other small businesses and then go through a rigorous process of developing and honing their business idea. Some processes culminate in a pitch day before potential investors. Getting into an accelerator can be tough: The application process is often both lengthy and competitive, so you’ll want to make sure you’ve got a solid business plan and a strong pitch ready before you apply.
  7. Venture capital: Like angel investors, venture capital firms typically make direct investments in new businesses in exchange for equity. Unlike angels, however, venture capitalists typically don't invest their own money. Rather, they manage funds of millions or billions of dollars spread across a number of different investments. Of all the financing options on this list, venture capital tends to place the largest bets (typically more than a million dollars at a time). For that reason, VCs tend to be highly selective about their investments, and they prioritize businesses they think are likely to generate huge returns and result in successful IPOs. Most businesses that receive VC funding already have a solid, revenue-generating business that they’re hoping to expand.

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