Starting a successful small business is an inimitably difficult undertaking. Very few are able to do it—data indicate that as many as 90% of startup ventures end in failure.
There are a number of factors that contribute to the sky-high failure rate of startup companies. In a survey of startup postmortems, nearly half of all failed startup companies cited “no market need” for their business as a contributing factor to their troubles. Ineptitude in the field of business management—inability to compete, dysfunctional staff, poor production, etc.—also contribute to the high percentage of entrepreneurial failures.
But aside from managerial inability, one of the most commonly cited “causes of death” for a young startup company is financial troubles, from not securing sufficient startup funding to an incapacity to maintain a healthy cash flow.
So what is the fix, then, for the financial woes of startup company owners? With bank loans increasingly difficult to secure, to where can an entrepreneur turn for startup funding? Check out these 6 options and decide which method works best for your business model.
Alternative Funding Options for New Business Owners
The U.S. Small Business Administration is a key resource for American small business owners, and prudent entrepreneurs take full advantage of all of the services that the organization offers. The SBA provides training, education and funding for the small companies that power the U.S. economy, and they even have a special microloan program for startup company owners.
The SBA’s 7(a) loan program is specifically in place for startup company owners, and it is a good go-to for any entrepreneur. The 7(a) loan program is theoretically good for up to $50,000 of startup capital. A word of caution, though—most of the approved loans only amount to $13,000, on average. All funding helps when launching a new small business, of course, but $13,000 isn’t enough to launch a startup business on its own. Startup company owners that do manage to secure SBA microloans will have to use the funding as a supplement to a larger source of capital, all the while accruing debt. Moreover, it is pretty difficult to get a microloan from the Small Business Administration, to begin with—the competition for funding is fierce.
Nonetheless, SBA Microloans through the 7(a) program are a great starting point for those that can manage to secure the funding. The $10,000+ will always serve as a useful supplement to your other means of startup capital.
Self-Funding, Family and/or Friends
Very few have the luxury of being able to entirely self-fund a startup company—but there are many that do dedicate some of their own personal wealth to their entrepreneurial endeavor. Some 24% of startups begin with personal loans from family or friends, and many entrepreneurial experts suggest turning to loved ones at the very beginning of their funding efforts. What’s more, studies suggest that over 80% of all startup company owners dip into their personal funds to kick-start their business venture. So—be prepared to put some “skin in the game.” You will likely need to invest your own capital in your enterprise. Self-funding is a good way to get the startup funding process started, and it also sends a message to potential investors—after all, if you, your family and your friends are not willing to invest in the project, it is unlikely that a third party will be willing to.
More and more startup businesses are opting to fund themselves credit card. This practice, however, is costly, and entirely untenable if you have bad credit. Even if you have a good credit score, funding a startup through credit card usage is not recommended— is seen as a surefire path to failure from many entrepreneurial pundits. Nonetheless, people have done it, and it is worth noting as an option (albeit a bad one, for the most part).
There are two types of crowdfunding that new business owners can employ in their startup campaign—rewards crowdfunding and equity crowdfunding.
Rewards crowdfunding is the most famous brand of crowdfunding—through this method, startup company owners solicit funding from donors in exchange for a gift or even a simple thank-you. The company does not partition shares of ownership to the donors and there is no monetary debt to be repaid. More recently, though, startup owners are turning to equity crowdfunding, in which angel investors finance a startup in exchange for equity ownership.
Crowdfunding is probably best option for startup company owners that need financing, but orchestrating a successful crowdfunding campaign is terribly difficult. While companies like Kickstarter and Indiegogo tout their success stories, such accounts are hardly representative of the average crowdfunding venture— half of all businesses that try to secure funding through such means do not receive any funding at all.
So—if you have impeccable internet savvy and a solid elevator speech, give crowdfunding a shot. But do not count on it. More than likely, you won’t receive any substantial startup funds through these means.
Merchant Cash Advances (MCAs)
A merchant cash advance is an advance of a fixed dollar amount in exchange for a percentage of a business’s future daily credit/debit sales.
This is a decent option for startup companies that are underway and already generating some revenue. Repayment for MCA’s is more or less flexible, and it is not difficult to qualify (remember, though, that typically, you have to have been in business for at least six months, have a positive balance in your business checking account and a credit score of at least 500).
MCA’s are not a primary source for startup funding in the most conventional of senses, as these programs cannot technically apply to enterprises that are not yet in business. MCA’s are more of a solution for funding shortages that arise once your company has opened its doors. However, your nascent operational costs can be funded from an MCA provider.
Take note that the terms of repayment in MCA agreements are typically steeper than other methods on this list, and the portion that the MCA company takes from credit/debit sales can be pretty high—especially if your business is in a slow spell.
Also known as accounts receivable factoring, invoice factoring is one of the most commonly used forms of alternative finance.
Invoice factoring is a process in which a factoring company essentially purchases another company’s outstanding invoices at a discounted rate, liquidating the invoice immediately for the client company. From there, a factoring company collects payments from the client’s debtors as the pay period transpires. This service caters to startup companies that can’t afford to wait 30-90 days for their clients to make payments—it essentially eliminates the deleterious “waiting game” associated with business-to-business invoices.
So what is in it for the factor, you ask? Factoring companies take a small percentage of the invoice’s value for themselves (called a “factoring fee”). While you lose a small percentage of the value of your invoice when working with a factoring company, the fast access to working capital allows you to further invest in your company or take on new clients. Moreover, the factoring company assumes the role of “collector” for the outstanding invoices, relieving you of the chore of pestering your clients for payments.
There are many options for you as entrepreneur when it comes to funding a startup company. Consider each one and assess which is most appropriate for your business. Typically, you will have to resort to a combination of the aforementioned methods— and that is perfectly okay. If throughout your research, you find that your company could benefit from the fast access to working capital offered by invoice factoring, get in touch with the Factoring Marketplace; our connections in the invoice factoring industry will guarantee that you get the best deal possible. Get in touch with one of our factoring experts today.