We have all heard rags-to-riches stories involving people who started small businesses in the garage only to become multimillionaires. Such stories are inspiring to would-be entrepreneurs the world over. Yet achieving business success usually doesn’t happen overnight. It requires a lot of hard work and sweat equity – as well as solid financial backing.
Funding a startup is where financial backing comes into play. Entrepreneurs should not assume they can walk into a bank and get a loan by signing a few papers. It doesn’t work that way. In fact, banks are usually reticent to loan to startup ventures.
So, what is the entrepreneur to do? There are lots of ways to fund a startup without going to a bank. The key is creativity. If you are an entrepreneur, the below suggestions are enough to get you started. Use your imagination from there.
Table of Contents
1. Angel Investment
There are different types of individuals active in the world of private investing. One group is known as angel investors. They are so named because they provide startup funding when no one else is willing to lend a hand. Angel investors are generally the first equity investors a startup engages with.
Understand that angel investors do not put their money into every project that comes across their desks. Securing an investment requires a good idea, a solid business plan, a competent management team, and the right timing. It also requires that the entrepreneur have some momentum behind them. To verify that, an investor will generally obtain a startup valuation report from a company like Mezy.
2. Friends and Family Members
Friends and family members can act as unofficial angel investors of sorts. It is unlikely that an entrepreneur could totally fund their business for a year or more with donations from friends and family members, but every little bit of cash helps. Ten friends willing to invest $1,000 each gets you started with a nice $10,000 bankroll. As a bonus, friends and family members are not likely to need startup valuation reports.
3. Crowdfunding Platforms
One of the more recent additions to startup funding is the crowdfunding platform. Crowdfunding is based on a lot of people investing small amounts. If you could convince 5,000 people to invest $10 each, you would wind up with $50,000.
The big challenge with crowdfunding is numbers. By definition, you have to get a lot of people interested in your company and whatever product or service you offer. Do that successfully and you could have access to quite a bit of funding.
Though bootstrapping is last on the list, it is actually the most important means of funding a startup without going to a bank. Bootstrapping is nothing more than using your own financial resources. Why is it so important? Because any investors you bring in from the outside are going to expect that you have some skin in the game. If you will not risk your own financial resources, why would others?
There are many different ways to bootstrap:
- Savings accounts
- Credit cards and home equity
- Life insurance loans
- Retirement account loans
- Second mortgages.
Plan on funding your business for up to two years before revenues are enough to be self-sustaining. At whatever point your business breaks even, you can start thinking about repaying your investors.
Now you know a few ways to fund a startup without going to a bank. You are going to need as many creative means as you can think of because banks rarely lend to entrepreneurs. With all that said, it is time for you to get to work.