Non-Traditional Ways to Finance a Business

When most people want to start a business, they will usually need some amount of financing. Some individuals are able to pay the upfront costs for their business. They are also able to pay out-of-pocket expenses when there is a gap in their company's cash flow. In most situations, individuals must look for outside financing for the necessary funding for their business. Debt financing is where a person borrows money from a lender. The money is paid back to the lender with interest over a specified amount of time. This is a very basic form of business financing. It is used in many situations to start a company as well as to grow it. There are also other options.

Angel Investors

These are individual investors who have the financial resources, as well as time to invest in a small business. Their motivation is to choose a company that will succeed. When this happens, the angel investor will experience a monetary return from a successful startup company. An angel investor will also offer help in making proper business decisions to help the company grow and expand. In many cases, this is a good option for individuals who need a large amount of financing to start the business. It is important that those starting the business and the angel investor share the goals of the company.

Crowdfunding

Many entrepreneurs have had success obtaining financing using a crowdfunding platform. These sites are designed to enable others to determine if a business is worth funding. This is an effective way to eliminate the traditional obligations associated with financing involving equity and debt. There is a drawback to using this method. It involves getting a large number of small contributions. This can make reaching financial goals a real challenge. Many people have had success with providing potential investors with an incentive to obtain funds. This could involve pre-sale access, extended discounts, and more.

Friends and Family

It is possible for some individuals to obtain financing for their company through borrowing it friends and family. This is a great way to avoid all of the costs associated with using a traditional financing option. In this case, the relationship between the lender and the borrower is already established. Some people are able to get funding from friends and family with just a verbal agreement. In other situations, a person may be asked to sign a legal document detailing repayment and more. It is important for both sides to know and understand the expectations for the company. This may help avoid bad feelings if the business is not as successful as anticipated.

Venture Capital

This is a situation where a venture capital firm will provide the capital necessary in return for equity in the business. In this situation, an entire company is investing in a new business. These are organizations that operate as a business designed to identify new companies who have a potential for high-growth. They will then invest in them. This is considered a very competitive type of funding. Obtaining this type of funding will require someone to determine the amount of financing they need, and how much equity they would be willing to give up for the financing.

Grants

Should a person want to start a business with an operation focused on research or science, they may qualify to obtain government grants. There are two main programs provided by the government. The Small Business Technology Transfer (STTR) program, as well as the Small Business Innovation Research (SBIR) program. There will be federal goals associated with research and development grant recipients that must be met. Another requirement is the company's products or services identified by their mcc code and must have significant potential for commercialization.

It is important for each company to carefully review their financing options. Any choice is going to involve preparation of information necessary to secure the financing. With traditional financing, there will be a fee, interest, and more to pay. Alternate financing will require learning what is specifically needed prior to moving forward with it. Any business financing will provide advantages as well as disadvantages. It is important for a start-up company to determine what best fits their individual business model.