Starting a new business can be among the most rewarding milestones in an entrepreneur’s journey. But no matter how brilliant your business idea, obtaining enough capital to launch your company is essential for success. According to smallbiztrends.com, startup and first-year costs often fall between $30,000 to $40,000.
There are many financing options and it’s important to consider which one is the best fit for your company. Many entrepreneurs have successfully leveraged one of the financing tools below.
Venture capital is a type of financing provided to startups with the potential for long-term growth. The majority of venture capital is provided by wealthy individuals, investment banks and other financial organizations. To obtain venture capital, you must convince investors that your company has outstanding growth potential. Investors become co-owners of the company and a higher investment results in a larger share in your firm. It can be challenging to obtain this type of financing and according to fundera.com; only 0.05% of startups raise venture capital.
Because startups have a limited track record of success — and typically minimal collateral — it can be difficult to obtain traditional financing. That’s why the U.S. Small Business Administration (SBA), a government agency that supports small businesses, provides an SBA guarantee that helps banks mitigate some of the lending risk.
Startups often use SBA loans to fund an owner-occupied real estate purchase, construction or improvements, as well as inventory, tenant/leasehold improvements, debt refinance or working capital. SBA loans provide benefits such as reasonable interest rates, low down payments and long repayment terms. SBA loans are subject to credit and SBA approval — so being creditworthy makes it more likely that your loan will be approved.
Crowdfunding allows you to raise capital through multiple funders, typically through popular websites like Kickstarter or Indiegogo. According to fundera.com, $17.2 billion was generated last year through crowdfunding in North America.
Typically, you will create a profile on a crowdfunding platform, describe your business story and list the amount of money you hope to raise. People can contribute to your campaign in exchange for an incentive such as a good or service, or in the case of investment crowdfunding, a debt or equity investment in your company. Because of its unique nature, crowdfunding needs the right marketing strategy to appeal to a mass audience.
Boise-based Crowdfund Better cites that more than 50% of all crowdfunding efforts fail to reach 10% of goal. This makes it critical to work with experienced professionals who can help you prepare for a crowdfunding campaign that drives people to action.
Pitch competitions such as Boise Entrepreneur Week allow entrepreneurs to pitch their company, product or services and compete for a cash award or investment funds. Participating in these competitions could help you attract attention from venture capital investors and create awareness of your startup. Because you’ll inevitably compete against other entrepreneurs who have similar business concepts, participating in pitch competitions will also help you develop your unique value proposition.
Obtaining capital validates your business ideas
Although obtaining capital can be challenging, it validates your business ideas and signals that your company has potential for growth. Moving forward with the right financing option will empower you to start and scale a successful company.
Brad Brockbank is the Idaho Community Banking sales manager for Zions Bank.