Sources of Start-Up Funding

You’ve come up with a plausible idea for a business. That is great! An idea gets you to the starting gate. However, you get into the race with money. Startup financing is the means to turn that idea into a real business.

Thankfully, today there are more sources of startup funding than ever before. While there are traditional financing sources from banks, credit unions, and investors, there are also new twists on startup funding with innovative crowdfunding and angel investors.

Here is a look at traditional and creative methods of funding your startup.

Major Sources of Startup Funding

Overall, most funding for startups falls into one of the four following categories.

Revenue. This is probably the most common method. You sell your product or service, receive money for it, and plow it back into the business to fund growth. It is also called bootstrapping, self-funding, and internal financing.

Equity. This is selling shares in your new venture in exchange for money, services of value to the new business, or work for the venture, called sweat equity.

Debt. Loans fund many startups. They can come from banks, credit unions, friends, family, and private investors.

Grants. This is money that is given to help a business get going, but requires no equity or repayment of the money. Not-for-profit companies receive most grant money, but for-profit entities are often eligible as well.

Specific Types of Funding

Here is a quick overview of the most common types of funding methods for startup companies.

Crowdfunding. Kickstarter and Indiegogo, among others, have provided robust, innovative ways for startups to raise money. The entrepreneur takes his case directly to the public in a crowdfunding campaign.

Angel Investing. Individuals with money and interest in investing in trendy ventures with strong growth potential are called angel investors. The best kind are accredited investors, with a net worth of at least $1 million or an income of $200,000 or more for each of the last two years. They often seek investments as a group.

Venture Capital Investing. The entire purpose of venture capital firms is to find promising businesses in their early stages of development who are looking for funding. The money often comes with a formal agreement that covers the timeframe for the firm to begin seeing a return on their investment.

Bootstrapping. Some aspiring entrepreneurs also obtain startup funding by self-funding: selling assets, withdrawing savings, borrowing against their home, maxing out credit cards, or tapping into their 401(k) savings.

Friends and Family. Loans can often come from the people who know you best and are rooting for you to succeed.

Bartering. Exchanging your products or services to other companies to get what you need to grow, whether office supplies, computer repair or expertise.

Small Business Grants. These can come from the local, state or federal government as part of an effort to stimulate the economy. Some nonprofits also offer them.

Small Business Administration (SBA). The SBA extends small loans and expertise to new businesses.

Lines of Credit. Banks and credit unions offer commercial lines of credit that are well-suited for startups. With a line of credit, you only pay interest on the funds you use rather than the entire approved loan amount.

Incubators. These can be universities, nonprofits, and companies specializing in this type of work. They provide labs, consulting, office space, marketing advice and sometimes money. Often they require equity in your startup in exchange.

Partnership. This involves finding someone who has substantial skills, friends, or money to contribute to your business in exchange for a percentage of it.

Major Customer. If your product or service is valuable to a single major customer, it might be willing to give you money for development and startup expenses. In exchange, it will have input and varying amounts of control over your production process.

Most new businesses use a mix of sources for startup financing. With the many options available and a commitment to your new business, you have an excellent opportunity to turn your idea into a thriving company.