In every business, there is one element that can make or break your startup during the early days – money. Most businesses follow the same pattern. They have a good idea and then pitch their ideas to a venture capitalist to find an angel investor. This is a good path but it is not always the best one. Businesses have to give up shares in equity to raise capital. When you get outside funding, the third party will sometimes act like they own the business, which is normal because they do. As the business continues to grow, it will need more money, which can lead to dilution, so the business owns less of their company each time. Entrepreneurs who want to avoid venture capitalists have very few options. Here are some good sources of outside funding.
Friends and Family
One of the most popular advice entrepreneurs receive is not to go into business with family or friends. This does not mean to say that you can’t borrow money from them. Nobody will love your ideas more than your friends and family. There is also less song and dance involved when you’re pitching your ideas to them. Aside from borrowing money, you can also get a lot of emotional support from them as you nurture your startup. Money and relationships can be a toxic mix though, especially if there is a lot of money involved. It usually leads to unwanted advice, demands for updates or miscommunication. The good news is, it does not always lead to this. Friends and family is a good place to start if you’re looking for outside funding.
Small Business Administration (SBA) Loans
Small Business Administration (SBA) is a government entity that provides assistance to small businesses such as loans and grants. In 2014, the SBA approved a total of 53,000 loans totaling $20 billion. The SBA has regional offices and is a good way to get funding without resulting to VC and diluting shares. Aside from this, they have a mentoring program called SCORE (Service Corps of Retired Executives) a good resource for startup companies. The SBA has specific requirements that businessmen need to meet and have a higher interest rate compared to other lending programs. However, they are a great option for funding.
The best way to make your business grow is to bootstrap existing capital and revenue. IP targeting startup El Toro started with “seed” money from family and friends. They supplemented their company growth by their cash flow. As the company continues to grow, it produces more cash which you can reinvest for additional equipment, people or other assets. This method won’t work for all businesses because you can only grow as fast as your revenue. The key to bootstrapping is the door that it can potentially open once you reach a certain size. When your company has reached a certain number (revenue), banks and other traditional lending institutions will become more open to lending you money.
Government and private sector grants are often overlooked as outside sources of funding. Grants are advantageous because they do not require businesses to give up equity or to return the money. It sounds too good to be true because it is. The process of getting a grant can be hellish.
For government grants, you need to find one first. It can exist in a branch of government or an offshoot of one. Once you find a grant, you need to know if funds are available. After this, you need to complete a long and complicated application process. Getting a government grant is a long process and usually scares off entrepreneurs who don’t want to wait or put in the work.
Private grants are easier to find but are also hard to get. Large corporations usually give out grants to give back to the community or receive benefits for their own.
Finding outside funding without VC can be challenging but it can be done. These ideas are unorthodox but can hopefully find you money to start your business.