There is one thing that stops most entrepreneurs in their tracks and that is funds. One of the most frequently asked questions on Quora (relating to business) is; how can I start a business with $20,000? Or what profitable business can I start with $10,000? And so on…… It is always good to consider how much money you have and how much money you need for your business. The difference between these two will help you know how far your current finance can take you and what your best financing option is. Speaking of the latter, there are 5 key financing options available for founders to choose from. I'll be discussing each one in detail as well as the pros and cons. Let’s dive in.

Bootstrapping 

This is also known as self-funding or self-financing. It is the very first and perhaps the most convenient method for founders to launch their startups. About 75 - 80% of small businesses are self-financed according to the Chambers of Commerce. In most cases, the funds are obtained from personal savings, family and friends, or both. This is often the first option for founders because it requires less formalities compared to the other options. Additionally, Bootstrapping puts less pressure on the founder. You are not under any pressure to show results. This would be the case if you were to receive funds from either an angel investor or a venture capitalist. 

\Also, if you happen to fund a startup with your personal savings, then you get to keep 100% of the equity and you are under no obligation to repay a monthly loan amount. Basically, self-funding is easy on the founder and gives them more room for error. However, there is a downside to bootstrapping. The most obvious is that the capital you can raise is small and that places a limit on what type of business you can fund with it. Some businesses are capital intensive while others are not. Other factors like location play a role in determining what the best funding option will be. 

Crowdfunding

Although relatively new, entrepreneurs and founders are turning to crowdfund to raise their startup capital. Crowdfunding as the name implies is a fundraising method where an entrepreneur receives cash donations from a large number of people to fund his business. This is usually done via an online platform. Depending on the platform you use, you may have any of the four types of crowdfunding options; donations, debts, rewards, and equity. 

Donation-based crowdfunding - here money is donated to help raise capital for a business with no strings attached. The donations are often purely out of interest for the idea or project and nothing more. As a result, this type of crowdfunding can be very competitive. 

Debt-based crowdfunding - this is a form of peer -2-peer lending dubbed crowdlending. In a crowdfunding model, the funds are given as a loan. In essence, the receiver is expected to pay back the loan with interest. This is similar to traditional bank loans, except this time, the loan is coming from a group of individuals rather than a bank. Although not as competitive as donation-based models, you need a good credit score and a convincing strategy (or idea) to attract investors. 

Reward-based crowdfunding - this is the most common crowdfunding model. Here the investors (or donors) receive a reward in exchange for their contribution. The type of reward given will vary depending on the type of business.  If the reward is tiered, it can motivate the donors to give more.

Equity-based crowdfunding - In this model, the donors or investors receive a share of the company in exchange for their donations. 

Crowdfunding is flexible. In addition to the four mentioned above, there is also a royalty-based model, where profits made, are shared among investors, and a hybrid model consisting of any two (or more) of the different models mentioned above are used simultaneously. According to Statista, crowdfunding is expected to reach a market cap of 28.9 billion USD by 2028. 

SBA Loans

SBA is an acronym for small business administration. It is an agency in the United States dedicated to providing counsel, contracts, and yes, capital to small businesses and entrepreneurs through its funding programs. To do this, the SBA partners with lenders across the States to provide much-needed access to loans. The loans provided are of 3 types; 7(a) loan, 504 loan, and microloan. The loan amount and eligibility requirements differ depending on the type of loan program. 7(a) loan is the most common loan program and it has a maximum loan amount of $5 million. 

How does your business generate income? what’s its credit history, and where does the business operate? These are some factors that would determine if you are eligible for the loan or not. 504 loans have a much higher range. Loan amounts could go from $5 million to $16.5 million for multiple projects. However, this type of loan can only be accessed via SBA’s community-based partners known as Certified Development Companies (CDCs). With microloans, you can get up to $50,000 to finance your business. This can serve as working capital, for expansion or to procure equipment and machinery for a small business. 

Although SBA loans are flexible, the application process is hectic and without proper guidance, it will be very difficult to get a loan. 

Angel Investors

These are individuals interested in, and who have the means to invest in startups. Angel investors typically invest between $25,000 to $100,000. However, you can get them to invest more, it all depends on how convincing your pitch is. In return, you may have to let go of 20 to 30% of your company (depending on the terms of the agreement). Angel investors are behind many of today’s high-profile companies such as Google. But one of the challenges most founders face is attracting an angel investor. To stand a better chance of attracting one, you should have a minimum viable product,  early adopters, and of course, a good pitch.

Venture Capital

This option is only accessible if your company is believed to have a long-term growth potential. Venture capitals are managed funds provided by institutions or private equity investors known as venture capitalists. In exchange for their investment, a venture capitalist will often require a stake in the company’s equity. Although they are also early-stage investors, most venture capitalists prefer to invest in startups that are fairly stable and are looking to scale up. A venture capitalist can go beyond simply funding your startup, but also provide counseling and relevant connections to help founders scale up faster. With VC backing, a founder can raise as much as $60 million. This is more than what you can get from any of the other funding sources. 

Conclusion

So far, we have talked about 6 different ways you can finance your startup and they each have their disadvantages and advantages. Also, the funding option available to you would depend on what stage your startup is at. Prior to having a working model or an MVP, the most likely sources of funding are bootstrapping, crowdfunding, and SBA loans (if you are in the US). The amount will vary as well. For startups that already have a working model, it is easier to get backed by either an angel investor or a VC. Whichever is the case, it is good to know that these options are available if you need them.