The ability to secure funds for a startup is the first step in turning your business dream into a reality. Unfortunately, this is often easier said than done especially when you have little or no collateral/security at hand.
It’s not a completely hopeless situation, however, as there are a number of avenues to explore, but as with any decision where money’s concerned, they should be carefully considered.
Here are 10 possibilities to get you started which will hopefully shed some light on your options.
1. Bank overdraft
There’s a negative stigma associated with the word ‘overdraft’ but if you don’t require a huge amount of capital, then a simple bank overdraft may suffice. The advantage to this over a loan is that you’ll keep your finances under one roof with your bank, and you’ll only get charged interest on the amount you use in overdraft when you use it (as opposed to a whole amount of a loan when funds are received).
The downside to this is that interest rate will likely be a little higher than that of a loan, and the overdraft limit will likely be a lot lower too. It’s a simple solution but only works if you only require a nominal amount.
2. Business credit cards
Business credit cards are essential when it comes to new startups to cover day-to-day costs. Depending on your circumstances and needs, you may find you can cover all your costs using credit cards alone. They are relatively easy to attain and there’s enough competition out there to get some pretty good deals with rewards points and 0% interest in the first year in some instances.
They do, however, have their limitations. Credit cards have limits which are usually based on your own personal credit rating. Even if your personal credit rating is good, the limit may not be enough for what you require. The other factor is the interest rate charged. Unless you’ve got one of the aforementioned deals (for which you should always read the fine print), the interest rates can be quite high and if you find yourself unable to make your minimum monthly payments the penalties incurred can quickly add up.
You’ll definitely be using business credit cards but to what extent will need to be determined in a balanced way.
3. Friends and family
Friends and family are often the first or last option an entrepreneur will look to. You obviously don’t trust anyone more than friends/family (hopefully), but things can get awkward very quickly if things don’t play out as planned. There’s nothing worse than being responsible for losing money that has been lent in good faith by those nearest and dearest, which can compound your stress.
A good rule of thumb to follow if you’re going to go down this route is to only do so if the friends/family involved are fully aware of the risks of any loan/investment. Try to be as clear and transparent as possible about the risks so they are fully informed about the situation. It will help if they’re passionate and enthused about what you’re doing, but having a complete understanding of the ins and outs is more important.
4. Personal loan
Using a personal loan to fund a startup is a legitimate way to get you going. The most common type to get is a secured loan, but for this exercise, we’re assuming little or no collateral, so we’ll focus on unsecured loans.
Unsecured personal loans are a quick way to get some funds when credit cards/overdrafts have been exhausted. The key difference between a secured and an unsecured personal loan is that the unsecured personal loan will usually mean higher fees and interest rates. This is understandable given the level of risk for the lender is much higher. The amount you can borrow for an unsecured loan compared to a secured loan tends to be a lot less as well.
It’s an option worth considering if you need cash quickly and are confident you can make repayments but is one where you will be paying a premium for every dollar loaned.
5. Business loan
A business loan is another option to look at but one that is a bit more challenging to receive with no collateral to offer. Unsecured business loans are even rarer than unsecured personal loans as the sums involved are typically larger.
The key difference between a personal and business loan is that the business is primarily responsible for the debt taken on as opposed to the individual. If repayments can’t be made, business assets are looked at first to recover debt instead of your personal assets.
There is a caveat, however, as most business loans require some sort of guarantor, which is often the individual applying for the loan, which the lender will look to should the business assets not cover the debt in its entirety.
The application process to get an unsecured business loan can also be a bit more thorough, with requirements that involve submitting financials and evidence of at least a year’s worth of revenue.
Unsecured business loans also have higher fees/interest rates and sometimes even a down payment for the loan, which can be discouraging. It’s not an impossible option to try, but you’ll need to be confident, convincing and well-organized.
6. Microloan
Microloans are a more recent phenomenon enabled largely by the peer-to-peer community via the internet. Microloans are small loans made by individuals to those who don’t have collateral to offer or a credit rating that makes them ineligible to apply for conventional loans. Microloan lenders favor them because, although the risk is high, the amounts being dealt with are more modest.
Microloans came from noble intentions and have predominantly been used to fund projects in third world countries where access to funds is more challenging. Having been successful with those types of endeavors, startups are increasingly utilizing microloans to get themselves started too.
It does often mean more work with multiple conversations required with numerous lenders to get the eventual sum you need, but startups sometimes find this is easier than convincing one individual/lender to take the risk in whole.
7. Business line of credit
A business line of credit is in some ways like a credit card but one in which you’re able to draw cash to pay for things when a credit card isn’t possible. Interest rates are often quite reasonable and are only charged against what you use. Many lenders will allow you to make repayments early without penalty if you’re in a position to do so.
It all sounds pretty good, but the reason why every entrepreneur isn’t using these during the startup phase is that like a business loan, the application process can be challenging. Credit ratings check, financials, evidence of revenue/orders, etc., can be a few steps too far for some.
It’s not without its risks either as like credit cards, the fees can stack up especially if you get behind on what’s owed.
8. Angel Investors
For anyone who’s seen an episode of Dragon’s Den, you’ll know about Angel Investors and how it works. A wealthy individual receives your proposition and, if it’s too their liking, makes an offer of capital for a share of the business.
On the plus side, they bring expertise, experience, and often invaluable connections. A disadvantage is that it usually comes at a reasonable ownership share. If you’ve invested a lot of time, energy, and creativity, it may be too much a price to pay.
Without a platform like Dragon’s Den, it can also be difficult to convince an investor you’re worth their busy time in the first place unless you’ve already got some significant progress with your startup.
Still, there are a lot of success stories in this respect so it is an option you should always keep an open mind too.
9. Crowdfunding
A modern and increasingly plausible way to finance a startup is through crowdfunding. Crowdfunding is the method of raising funds where you pitch your project via an online platform for (hopefully) a large number of people to contribute too. The investment is usually donations-based, rewards-based, or equity-based.
There’s now a plethora of platforms now offering the opportunity for entrepreneurs to submit their proposals. This includes sites like Kickstarter, Indiegogo, Seedrs, Crowdfunder, and Patreon to name a few.
At its best, crowdfunding can save you time and money and get you quick access to funds. It can also be a great place to test your idea before a wider audience and way to market your product.
There are some drawbacks however. Complex or more technical projects sometimes struggle with crowdfunding if not simplified for the masses. Projects with sizeable targets can sometimes be hard to realise. There is often less flexibility for change if successful to prevent entrepreneurs from pitching one idea, then changing their minds once funding goals have been reached.
That being said, there’s little to be lost in trying at the very least, so it should always be at the forefront of your thinking.
10. Grants
Depending on where you’re based, you may be eligible to apply for and receive a government grant for a startup. There are also some privately-run accelerator programs that are aimed at startups.
In New Zealand for instance, there is the Callaghan Innovation Pre-incubation Loans aimed at tech startups.
In the US there are state and local grants and have organizations like the Small Business Administration who can offer advice.
Receiving a grant can be a time-consuming process with a thorough business plan required. It can also be quite competitive as there is often a lot of applicants vs funds available.
Another common requirement is that you may also have to match any funding you receive which is something you should be mindful of from the outset.
Given the fact that a grant is essentially free money investing a bit of time is well worth the effort.
Conclusion
As you can see, there are a good number of options to explore to get your startup up and running. The key is to be organized, well-researched and proactive in understanding the key benefits and risks before pursuing the solution that’s right for you.
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