5 Important Questions To Ask Before Seeking Alternative Startup Finance
Despite the notion that securing investors through venture capitalists or angel investors is the most common way that most startups are funded, this is simply not the case. In fact, bootstrapping is among the most common strategies for funding most new startups.
According to Investopedia, bootstrapping is defined as “building a company from the ground up with nothing but personal savings, and with luck, the cash coming in from the first sales.” The term is also used as a noun: A bootstrap is a business an entrepreneur with little or no outside cash or other support launches.
This actually should read “personal resources” since the cash can come from credit credits, home equity loans, lines of credit and similar. But bootstrapping isn’t right for every founder and every startup. Below you will find a list of some of the more common alternative financing strategies for startups and small business funding options. I’ve also included a brief description of each and questions you should ask yourself before determining if this a viable funding strategy for your startup or small business.
5 Questions before Seeking Alternative Startup Finance
|Alternative Business Finance Strategy||Brief Description||Questions You Should Ask Yourself Before Pursuing|
|1. Friends and Family||Asking friends or family to invest in a new business is a very informal financing strategy. This is among the simplest ways to finance a startup business. The pros – can offer quick turnaround and usually doesn’t require an extensive business plan. The cons – borrowing money from friends and loved ones can destroy relationships.||Are you okay with the prospect that doing business with family and friends could destroy the relationship? As a founder, I have ignored these warnings and the outcomes were not good.|
|2. Crowdfunding||While most of the hype surrounding crowdfunding has largely died down, it still remains a popular alternative funding source for businesses. Here, small amounts of money are raised from a large group of people via crowdfunding websites. The pros – can offer quick turnaround and a great deal of flexibility. The cons – not all businesses are right for crowdfunding and truth is, most campaigns fail. Only 7%to about 37% of crowdfunding campaigns are successful.||A well-executed crowdfunding strategy is difficult and time-consuming. most of the really difficult campaign work is done before the campaign is even launched. Before looking at this as an option, ask yourself if you are really willing to learn the proper techniques and invest the time and resources to be successful?|
|3. Equity investors (venture capital, angel investors)||Equity investors typically provide investment in exchange for equity in the company. While VCs and angels are among the most sought after funding sources for startups, the reality is that just a tiny portion of startups actually receive funding from VCs or angel investors. The pros: can provide a large sum of capital. The cons: founders risk giving control of their startups.||For me, the most important question to ask is “Can I work with this investor and feel comfortable?” As a founder, I have taken investment money from someone who gave me doubts, right from the start. I regretted taking the money and it led to countless losses, fights and many sleepless nights.|
|4. Bank Loans||Bank financing used to be an attractive option for funding a startup. But since the 2008 global economic meltdown, today, bank financing for startups is available to only those persons who are deemed among the most creditworthy. The pros – if it is available to you, business loans and lines of credit can offer reasonable, consistent interest rates and flexible payment plans. The cons – mostly unattainable if you have poor credit.||The question to ask here is “Can my business maintain sufficient cash flow to pay back the business loan?” Banks and other financial institutions tend to not be very forgiving when payments are missed. Be certain that you can keep up the payments if you are considering a bank loan as a source of alternative finance for your business.|
|5. Government grants, cooperative agreements||Government business grants are only awarded to businesses conducting activities that support strategic priorities. If your business or project is aligned to one of those priorities then government business grants can be an attractive option. The pros – business grants do not require the owner to give up equity or control and the funds do not have to be paid back. The cons – the business grants landscape is highly competitive with only about 3% to 8% getting funded.||Before considering this option, ask yourself, “Is my business aligned to any of the strategic priorities the funder has outlined?” If the answer is no or you are not sure, then you should consult with a professional before moving forward. Hiring a business grants expert can significantly increase your likelihood of success.|
Other Suggestions to Consider before Alternative Finance
1. What is the Goal and Strategy of Your Business?
For example, VCs and angel investors are typically only interested in high-growth, high-return startups with strong traction.
2. What Finance Options are Best-Suited Based on Your Business Type and Payment Terms?
Conduct a thorough analysis to determine what is best for you and your business.
3. Are You and Your Business Eligible for Such Funding?
Before wasting time for any type of business funding, develop a funding plan, analyze all funding sources and determine your eligibility for each.
4. Are You Prepared to Deal with the Consequences of Default or Failure?
If your startup or business fails, are you prepared to deal with the consequences of default or telling friends, family and/or investors that your startup has failed?
5. Have you Read Up and/or Consulted Experts?
Before making any kind of decision regarding alternative business finance strategies, learn as much as you can by reading and consulting experts. However, be wary of some ‘experts’ who promise the moon but fail to deliver. Particularly when dealing with venture capital, angel investors, other types of equity investors, and government business grants, there are laws and regulations that must be followed.
Resources for Learning More About Alternative Finance
The Founder Institute offers a tremendous amount of free resources to help founders learn about various funding sources for startups.
The US Small Business Administration also offers a wealth of resources and guidance tools to help founders and small business owners to learn more about a variety of possible funding sources for your business. Find your local Small Business Development Center here.
Need help developing a solid business plan or getting free expert advice from a seasoned professional? If so, then be sure to check out organizations such as SCORE.org, BusinessAdvising.org (operated by Pacific Community Ventures) and others.
Want to learn more about government business grants? Grants.gov is the first place you should start. Here you can find a free, searchable database of all federal business grants, cooperative agreements and other non-traditional funding instruments. I’m also happy to answer any questions you might have about business grants, cooperative agreements or any other sources of government-based non-dilutive, non-traditional funding instruments. Simply contact me and we can talk.
Good luck and remember that making a determination about the best way to determine the best funding source for your startup or small business is never easy. But taking the time to do your homework and completing a thorough analysis of all your options is definitely worth the time and effort!