What Are the Various Ways of Funding a Startup?

No matter what industry you’re in, acquiring funding is an essential step in launching and growing your startup. But with so many funding options available, how do you determine the right way to secure the capital you need for your startup?

In this guide, we’ll break down all the ways your startup can source funding, outlining their benefits and potential drawbacks. Whether you’re looking for a debt-free source of funding or capital that comes with strategic industry support, you’re sure to find the right fit for your startup.

1. Personal Savings 

The most straightforward way to fund a startup is by dipping into your own personal savings. 

Whether you use money saved in bank accounts or liquidate some assets such as property, this can be a quick way to get the funds needed without having to endure any lengthy application processes or repayment plans.

Advantages

The biggest advantage to using your own resources is that you get to retain full ownership and control of your business. Additionally, you won’t have any resulting debt and there are no repayments to be made, which can feel very freeing.

Using personal savings is also a good option if your credit rating isn’t stellar.

Potential Drawbacks

The problem with self-funding is that the financial risk is entirely yours. If the startup fails, then the money is lost and you have no recourse or backup.

Additionally, many individuals simply don’t have large amounts of resources available, making it a non-viable option. Most startup owners need to acquire funding from an external source. 

2. Friends and Family 

Borrowing money from friends and family is another common funding method for startups, especially during the early stages.

This involves raising the capital from those closest to you, either as a loan or in exchange for a stake in the business.

Advantages

Like self-funding, borrowing from friends and family who have money to spare can be a quick and easy way to obtain funding for startups. It’s also nice to have the support and buy-in from those you care about the most. 

Depending on your relationship, you can negotiate excellent repayment terms and you retain more control over your business.

Potential Drawbacks

Borrowing from friends and family can be a double-edged sword. 

If you’re delayed in repaying your loved one back, or if the startup folds, there’s a high potential for disputes that could strain or even destroy the relationship. If you don’t want to risk damaging your relationships, then this might not be the right strategy for you. 

Oftentimes, startup owners are tempted to forgo official agreements with friends and family. However, informal agreements can put you in a bad situation from a legal perspective, especially if things don’t go as planned.

If you choose to go this route, consult with your attorney and draw up an official agreement. This will protect both parties in the event of an issue.

3. Bootstrapping 

“Bootstrapping” is a term used to describe the process of using existing resources to grow something without relying on external assistance. For a startup, this would involve using revenue generated from the business to fund further growth.

Advantages

This is another way to get the desired funding without having to give up control or equity. It also encourages you to streamline business practices and prioritize efficiency so you can maximize profits. Both are good business practices to uphold.

This method also helps you avoid going into debt, as there are no repayments to worry about.

Potential Drawbacks

For bootstrapping to work, your startup has to already be making money. That means that this is not a viable option for early-stage startups or those still in the pre-launch phase. 

Bootstrapping is also a slow process—funding trickles in gradually, which may cause delays in executing growth plans.

Moreover, those who operate in capital-intensive industries may struggle because the funds raised won’t be sufficient for their needs.

4. Angel Investors 

Angel investors are wealthy individuals who are willing to provide funding for startups in exchange for a stake in the business. This can either be equity or convertible debt.

Angel investment is typically used for seed funding during the initial—and most critical—stages of a startup’s journey. If you’re wondering how to get investors for a small business, angel investors are often a good place to start, especially if you’re looking for both capital and strategic support.

Advantages

As a startup founder, it can be very beneficial to partner with angel investors who have a deep knowledge of your industry. You can gain access to expertise, mentorship and other valuable business connections.

If you require substantial capital, then this is one of the best ways to get it since there are no repayment obligations.

Potential Drawbacks

This is the first method we’ve discussed where you have to give up part of your business in exchange for funding. While some angel investors are silent and don’t get involved with your business, others like to be involved and may want you to go in a direction you disagree with.

Finding the right angel investor isn’t always straightforward and it can be a time-consuming process. No matter who you choose to obtain funding from, there will be high expectations for significant growth and returns, so you will feel pressure to perform.

5. Venture Capital (VC) 

Venture capital is another common funding source for startups. It is private equity financing given to companies that can demonstrate a high-growth potential.

It’s typically offered by venture capital firms which provide the funds via a pool of investors, in return for equity in your company.

Advantages

Venture capital firms are significant players in the investment world, and have the capacity to provide large amounts of capital. Like angel investment, you’ll gain access to experienced investors with expansive knowledge of the startup industry.

Moreover, successfully obtaining venture capital makes you look credible and reliable, boosting your chances of securing future investment.

Potential Drawbacks

The amount of equity you are expected to give up won’t be small, and you’ll be expected to set and meet aggressive growth targets. This is an option only for startups that have a rapid and high-growth potential. Slow-growth businesses will not attract venture capitalists.

6. Crowdfunding 

Crowdfunding, a relatively new funding method, is rapidly gaining in popularity because it can provide large amounts of capital without sacrificing large amounts of equity.

Platforms like Kickstarter and Indiegogo allow startup founders to pitch their ideas, which the public can then opt to fund.

Advantages

Crowdfunding is a great way to validate ideas before you develop them. If the public is keen to see it come to fruition, they will invest. Plus, you start building a loyal fanbase right from the get-go.

Besides, their models are flexible. You can offer rewards and perks in exchange for funding, or it can be purely donation-based.

Potential Drawbacks

Depending on how you crowdfund, you’re not guaranteed to receive any funding, especially if your targets aren’t met. Even if you do meet your goal, online platforms charge fees, which are typically a percentage of what you raise.

Crowdfunding can be time-consuming, and you’ll need to be a marketing pro to get your ideas in front of the right people.

7. Business Loans 

Business loans from traditional lenders are another avenue to explore. Some financial institutions have loans specially designed for startup companies. You’ll be offered the funding which you’ll then be obligated to repay according to the terms and interest rates.

Advantages

Traditional lenders don’t require you to give up any equity in your business, and repayment terms are predictable because they will be laid out at the start.

Business loans are a good option if you have an exemplary credit history.

Potential Drawbacks

Should your business struggle, there’s always the risk that you can default on the loan and damage your credit rating. 

Business loans can also end up costing you more over time than other funding sources. Interest rates can be high and place an additional financial burden on your expenses. The lender may also require collateral to secure the loan.

8. Grants and Competitions 

Occasionally, grants or competitions may be offered where you can apply to receive funding without any obligation to repay. Essentially, it’s free money, so if you find one available, it’s worth going for.

Advantages

Winning a grant or competition validates your business idea and can make your startup look attractive to future investors.

You’ll get the money without having to lose equity or make repayments. As an added bonus, grants often include additional perks like access to expertise.

Potential Drawbacks

As you can imagine, grants and competitions are highly competitive and the application process is time-consuming and detailed. It’s unlikely the funding amount will cover all your needs, and there may be restrictions placed on how the funds can be used.

9. Revenue-Based Financing 

Revenue-based financing allows you to secure funding from investors without giving up equity. Instead, you must repay the investment over time. The repayments are tied to business performance and involve giving up a percentage of your monthly revenue.

Advantages

Revenue-based financing offers a flexible and affordable payment structure. It’s a good option for startups that are likely to have predictable and steady revenue streams. Plus, there’s no need to sacrifice your equity.

Potential Drawbacks

Interest rates for revenue-based financing may be higher than traditional loans. Just like other loans, long-term repayments can become a burden.

Besides, this is not a suitable option for startups that are not yet bringing in revenue.

10. Strategic Partnerships 

It’s possible to collaborate with established companies that have the capital to invest in projects that align with their industry. By partnering with such an organization, you get access to funding and resources in an arrangement that is mutually beneficial.

Advantages

You’ll get to learn from an experienced company and access its resources. There is potential for a long-term partnership if successful.

Strategic partnerships are typically best for slower-growth startups because there is less focus on immediate returns.

Potential Drawbacks

For the partnership to work, your goals must consistently align. You will likely have to give up some control and decision-making autonomy. You may have to make some significant compromises to satisfy the other organization.

11. Incubators & Accelerators 

These are specialized and structured programs that typically operate in your local area. They provide startups with funding, mentorship and additional resources to help startups succeed.

Advantages

Incubators are another great way to gain access to expertise and networking opportunities. They typically provide seed funding and can also include office space and equipment.

Potential Drawbacks

Like grants, incubators are a highly competitive environment and organizations are selective. You may be required to give up equity, and the programs require a significant time investment.

12. Pre-Sales or Product-Based Funding

It’s possible to raise funds by selling your products and services before they are fully developed or available; for example, offering an early-bird discount to customers who are prepared to wait.

Advantages

Pre-sales is a good way to validate the demand for a product before it hits the market. It starts building an audience and customer loyalty early on, and you’ll get access to funds without losing equity in your business.

Potential Drawbacks

You must have your marketing strategies on point in order to reach customers before your business is fully up and running. Be aware that potential hiccups can create a delay in getting your products to market, which can frustrate your customers.

Selling upfront may lead to slower revenue once your products launch, so it’s crucial to implement strategies to keep your momentum going.

Choosing the Right Funding Option

Before diving into the different funding startup options—and to ensure you make the right choice—there are a few key factors to consider:

• Stage of your startup: Some funding options are good for the early stage and some are only viable if you are generating revenue.
• Amount of capital needed: How much do you actually need? Smaller amounts could be generated from personal or family funds, while large amounts will require outside investment.
• Willingness to give up ownership: Are you happy to give up equity in your company if it means getting the right funding? If not, options like bootstrapping or traditional loans may be the right path.
• Growth goals and scalability: How aggressive is your growth strategy? High growth will attract venture capitalists and angel investors, while slower growth will benefit from other funding methods like bootstrapping.

Conclusion

When looking at how to get funds for startup companies, it’s crucial to weigh your available options carefully and match funding sources that align with your business goals.

Make sure you are happy with what is expected from you in return. Don’t pick an option that requires you to give up more equity than you want.

We understand that choosing the right funding method can feel overwhelming, especially with so many options available. However, you can actually use this to your advantage. No matter your startup’s stage or industry, there’s a funding solution available.

For help deciding the best path, get in touch with Finvisor. We specialize in assisting startups and ensure they get the right type of funding. We provide ongoing financial services and support so you can be confident that you’re making the best of your valuable funds.

Contact our team today to find out more!