Starting a business requires some combination of moxie and money. While moxie is something an entrepreneur innately has or doesn’t have, money can be obtained in a variety of ways. An enlightened entrepreneur will weigh his or her options to decide which avenues are best suited for the fledgling organization.
This list is not an endorsement of one method over another.
1. Angel investor/Venture capitalist (Direct transfer of funds)
Most companies specialize in selling products and services to customers and not on raising capital. These companies can turn to third parties to raise money for them. Perhaps one of the most common ways a company can get off the ground is through an angel investor or a venture capitalist. An angel investor is a wealthy private investor who provides funds in exchange for company stocks and/or bonds. A venture capitalist is similar but can be an investment firm or an individual. This method is called private placement because the securities are offered and sold directly to a handful of investors.
This method is good from the company’s perspective because most of the monetary risk is assumed by the angel investor or venture capitalist, but its drawbacks are that the company splits ownership with the investor and usually owes them deference.
2. Investment banker (Indirect transfer of funds)
Another option for raising funds is to go through an investment banking firm. Often, an investment banking firm will work with other investment bankers when helping a company raise capital. They will buy all the company’s securities and then resell them to the investing public for a profit. This is a public offering. Both individual and institutional investors have the opportunity to purchase the securities. Morgan Stanley and Goldman Sachs are examples of banks that perform investment banking duties.
3. Financial intermediary (Indirect transfer of funds)
A financial intermediary is another option for raising funds. In this instance, the intermediary issues its own securities to individuals in exchange for funds that it then uses to acquire the securities of the company in need of funds. With this option, the company raises money in a more roundabout way.
4. Bank loan
This option is on the table, but it’s perhaps the least advisable method of raising capital for a business. In fact, billionaire Mark Cuban has said, “If you’re starting a business and you take out a loan, you’re a moron.” This is because by taking out a loan you assume all the risk single-handedly. If the business fails, you’re still obligated to repay the loan plus interest. If you put down an asset as collateral (like your house), you could end up losing it.
Also, the bank won’t be committed to the success of your company the same way an investor would be. So, it’s probably best to consider other options. In fact, Mark Cuban has also said you can start a business with next to no capital anyway. “Small businesses don’t fail for lack of capital,” he said. “They fail for lack of brains. They fail for lack of effort.”
5. Friends and family
You’ve probably heard that it’s not a good idea to do business with friends and family. Asking them for money to start a business isn’t the most advisable option. It might be hard to live down if the business fails, and they might expect their investment back. However, some friends and family members make good business partners, so don’t completely discount it.
6. Crowdfunding platforms
There are fundraising sites like Kickstarter and Indiegogo that allow users to create campaigns for various projects where anyone can donate. Although these sites are geared more toward funding independent creative projects like films, music and books, there’s no reason they can’t be used to develop a product or service. There are some controversies surrounding these sites though. For example, it’s hard to monitor whether people actually use the money to do what they said they would, but that hasn’t stopped these sites from enabling some hugely successful campaigns.
Some of the most successful companies have been started with a shoestring budget in a garage. For example, Hewlett-Packard was started with just $538 in a garage and is today one of the biggest technology companies in the world. Other examples of companies started in garages include Microsoft, Apple, Google, Disney, Mattel and Amazon. In other cases, businesses have been started on the side by people who maintain unrelated jobs.
8. Government grants
Of all the options available for funding a business, this is perhaps the biggest shot in the dark, but there are grants available for certain types of businesses. Most government grants for small businesses are reserved for the research and development efforts of companies in the medical, scientific and environmental conservation fields. There is a lot of competition for these grants. They have strings attached. For example, detailed accounts of expenditures must be kept, thorough audits are conducted, goals must be set, approved and followed exactly.
9. Other grant-giving foundations
There are other grant-giving foundations, like the Bill and Melinda Gates Foundation and the Michael and Susan Dell Foundation that are designed to enable projects aimed at addressing major world problems.
10. Unconventional miscellany
There are other more unconventional methods for raising capital. For example, on the TV show Shark Tank hopeful entrepreneurs pitch their ideas to a panel of potential investors. This is basically the same as the first option on this list (funding from an angel investor). Also, there are various invention conventions where inventors can show off their products in hopes of attracting attention.
10 Ways Small Businesses Can Obtain Funding