As a startup or small business owner, you’ve likely had to make plenty of decisions. Should you hire staff, or make things happen on your own? When should you take your project to market? And most importantly — how are you going to pay for it?
There are more funding options for entrepreneurs than ever. From bootstrapping plans together to seeking out venture debt, government grants, or a traditional loan, it’s becoming easier for business owners to finance their big ideas. Wondering how they do it? Here are a few of the most popular options:
Bootstrapping
While not technically a ‘loan’, bootstrapped companies start with very little outside investment and grow using the businesses’ assets or assets of their own. Early stage bootstrapped companies spend frugally and may forego expensive hires, marketing campaigns, or product research in favor of getting a viable product to market and making some sales.
Advantages to bootstrapping include maintaining more control of the business (no dilution), and being able to raise capital more easily later on, since your business has no debt and some sales. Disadvantages include risk (it’s your own money on the line) and slower returns thanks to having less cash.
Traditional Debt
Lines of credit, traditional term loans, or loans backed by collateral like property or equipment are all considered traditional debt. While this type of debt can potentially have lower interest rates for more established business owners, it can also take longer to obtain and be inaccessible to businesses that are newly founded, have little credit history, or few capital assets.
If you’re looking to finance a physical asset like machinery or land, traditional debt could be the way to go. It could also be used in combination with other types of funding to lower your cost of capital overall.
Venture Debt
In many industries, especially tech, traditional lending may not be fast enough, flexible enough, or offer the necessary amount of capital to meet business needs. Technology companies who have been in the market for a short time might have sales, but not the credit history or assets to back their need for cash.
In these cases, companies can seek out venture debt, obtaining funds on the basis of what they do have — revenue, growth, accounts receivable, or grants. In the case of revenue-based financing (RBF), companies can obtain a loan based on their potential for sales, paying 1-10% of revenue over an agreed upon term and making a balloon repayment at the end.
These models can offer both sides of the deal a ‘win win’. Funding companies invest in businesses they believe in, and businesses get access to capital they wouldn’t have been able to otherwise, with no payments during the times when they aren’t making money.
Venture Capital
Venture capitalists want ‘home run’ business ideas. Although you might not be making money now, if you have an idea that you (and your lender) believe will take off to stratospheric new heights, you could obtain funding on the basis of giving up a piece of your company.
Venture capital can be combined with other funding models and used at many different stages of your business. For example, a business could use a traditional equipment loan to pay for a new factory, RBF to extend runway between funding rounds, and VC when it’s in an ideal position to pitch to investors.
One of the advantages of venture capital is that you don’t have to take on debt, which means no interest. This can increase your financial runway. However, since you do need to give up a portion of the company, you likely want to position your business to get the highest valuation possible.
You might use one, two, or all four of these methods at various points in your entrepreneurial career. With so many funding options for entrepreneurs available, businesses have more flexibility than ever — which means more room for innovation, creativity, and new ideas!
