4 Funding Sources for Your Startup: Benefits, Pitfalls, and Tips

Funding is always a concern for startups and small businesses. Hundreds of business articles over the last several years have detailed how few bank loans are being approved. And while lots of attention is given to venture capitalists and angel investors, they typically only fund about 17,000 of the 500,000 or so businesses that get founded each year.

Of course, not all small businesses or startups need as much funding as VCs hand out, and because of that and a variety of other reasons, many business owners seek other funding sources. I’m going to outline four ways to raise money for your small business–both traditional and nontraditional–and point out some of the benefits they each deliver as well as some of the dangers you need to avoid.

1. Family and friends

Asking the people you know best for money is a time-honored tradition. The primary benefit is that these people know you and generally want to support you, so they’re often inclined to help out.

First, before you approach your family and friends, you should have already put up some of your own money. You need to demonstrate your commitment before you can ask others to commit.

With that done, the next step is to decide if you want a loan or if you are selling shares in your venture. In either case, be sure your agreement is put in writing; don’t think that just because these people are close to you that you can get by with some kind of “informal” understanding.

Tip: When you’re talking to friends and family members ask them if they know anyone who would be interested in backing your venture. This is especially true if you’re selling shares.

The downside of these arrangements is that not only can you lose your business, you can ultimately lose your good relationships with friends and family members.

2. Crowdfunding

While the banks are seemingly on a partial holiday from writing small business loans, much of the slack has been taken up by crowdfunding sources. There are two basic “flavors” of crowdfunding:

• You give away some kind of premium in exchange for money, and
• You grant shares in your company.

The law on crowdfunding has recently changed and you must fully understand the details before you launch a crowdfunding campaign. Here’s one warning: If you do a Kickstarter-style campaign, all the money you collect is essentially taxable income, so at the end of the day you may have less money than you expect or need.

Tip: Crowdfunding veterans always stress the importance of top-quality promotional materials, including videos. Be ready to sell your idea as soon as you go to the public; you only have one opportunity to make a first impression!

3. Credit cards

Many business owners get their initial funding by running up their credit cards, and it’s not always a bad idea. The founders of Google originally funded their company on their credit cards, and their friends’ credit cards…and their parents’ credit cards!

Borrowing on your credit cards can be dangerous, but if you do it with the right strategy, you reduce the danger. Don’t use your credit cards to pay salaries or overhead expenses; buy tangible assets–especially those that will retain a good amount of their value. That way, if your business goes south, you can sell the assets and make a dent in your credit card debt.

An online camera lens renting company bought all of its initial lenses on credit cards. The lenses retained good value and the owners knew exactly how much monthly income they could expect per lens. This allowed them to be certain they could keep up with their credit card payments.

4. Car title loan

I’ve heard about a lot of founders who have mortgaged their homes to get startup funds. Frankly, if you need that much money, you should probably be trying to get a conventional small business loan, or knocking on the doors of angel investors or VCs.

If you own a clear title on your car--i.e., you don’t owe any money on it--you can usually get a loan quickly by offering your car as collateral. Car title loans are also called “pink slip loans” and often you’ll be able to get a better interest rate than you would if you started running up new credit cards.

Two benefits of these loans are that you know exactly what your risk is and what your payments will be. This allows you to intelligently plan for the next several months. If you take the advice I gave for credit cards–use the funds for tangible assets–you can reduce your risk. Further, if you’re managing an established business with predictable slow times, a car title loan could be a solution.

The funding sources outlined here can generate any amount from a few thousand dollars to a few hundred thousand dollars. The trick is to match your funding needs and your ability to counterbalance the risks of each to get the best chance at success in your business.