You have the best idea for a new business since Twitter. Everyone you know says it’s sure to be a winner. You’re smart. You have a degree from a great university. You work hard.
But you have no money. And you’re not alone. In a recent survey from Palo Alto Software, 45 percent of startups said that difficulty finding financing is hampering growth. The survey found that securing investors is one of the top three goals of startups in 2014, and more than half are seeking at least $100,000 in funding.
How can you get your company off the ground when you’re pretty much broke?
Let me warn you. This won’t be easy. You won’t be able to walk into a bank, dazzle the personal banker or loan officer with your effervescent personally and 10-second elevator pitch, and walk away with an amazing line of credit. Most traditional banks are far too conservative to fund startups. Why? The vast majority of these businesses fail! Banks just won’t take the risk.
So, you’ll have to be more creative. And you’ll want legal advice along the way to avoid making a mistake that could cost you dearly in the long run. Find a lawyer to review any financial contract you sign. Have the lawyer review any term sheet you’re considering. And if possible, ask the lawyer to introduce you to some potential funders.
Meanwhile, consider any or all of these ways to raise the money to fund your new company. Look them over and determine which will work best for you.
1. Personal savings – if you have any. If so, you’ll need to determine how much you want to risk on your company and how much you’ll need to save in case you’re company just doesn’t make it. If you have no personal savings, keep looking down this list.
2. Family and friends – This is an easy place to start because these are people who know you and (hopefully) love you. It’s easy to ask them for money because you likely see or communicate with them often. You can make a less formal ask than you would by going to strangers. But be careful. Find out if they are giving you the money or loaning it to you – and under what terms. And whatever you do, remember to warn these lovely friends and family members in advance that they may never see their money again. Why? Like I said earlier, most startups fail.
3. Credit cards – Although this is a really expensive way to fund your startup (interest rates average around 15 percent, according to Bankrate.com), some people do max out their credit cards to fund their business until they start making money. I personally don’t recommend this. But if you do go this route, pay off your high credit card debts first so you can get rid of the quickly accruing interest charges.
4. Home equity loans – if you have a home that you can borrow against and if you can get a loan, which are getting harder to secure. Here’s the really bad down side of this type of funding. If you get a home equity loan and your business fails and you default on this loan you risk losing your home as well as your failing business.
5. Grants and contests – The government and some associations offer grants for new businesses. Look to your state and local government for new business grants. Also, the National Association for the Self-Employed offers grants and scholarships. In addition, many large companies recognize the importance of innovation and want to support startups that can help their industry. Look to the major players within your industry to see if they run any competitions.
6. Angel investors – although venture capitalists (VCs) get a lot of attention for the large investments they make in early-stage companies, the real driver behind early startups are angel investors. These are individuals who earn at least $200,000 per year, have at least $1 million in assets, and many times have already created successful businesses. They have the money, the smarts, the time, and the interest to support entrepreneurs with amazing ideas. The Angel Capital Association represents 220 angel groups and more than 12,000 individual accredited investors and includes a wealth of information on its website, www.angelcapitalassociation.org, to help entrepreneurs connect with potential angel funders.
The 2013 HALO report, released March 27, 2014, by the Angel Resource Institute, Silicon Valley Bank, and CB Insights, offers additional statistics about angel investing and angel investors.
7. Crowdfunding – This includes the very grassroots “everybody can participate” crowdfunding websites such as Kickstarter and RocketHub to the new equity funding platforms for accredited investors such as AngelList and FundersClub. You make a pitch through these sites and hope to watch the money roll in. If it doesn’t, at least this offered you a relatively inexpensive way to test the popularity of your idea.
So go ahead. Take your big idea and run with it. Go out and find funding, get the legal advice you need to stay out of trouble and protect yourself, and become the next big corporate success story.
Comments on this article are closed.