5 Realistic Ways To Fund Your Startup

Starting your first business is exciting, but it can also be expensive, especially if you don’t have the funds to get it going yourself.

For many founders, especially today, the early stages are some of the hardest. Costs pile up, trying to get investors on board is harder than ever and marketing is both expensive and confusing.

In fact, stats by Equidam reveal that only 3% of pre-seed startups actually manage to secure funding. Couple that with the stat that 10-20% of startups often fail within the first year, and it can seem like an intimidating venture to take on.

The good news is however, that nowadays, there are quite a few ways for startups to fund themselves, without needing to compete with thousands of other businesses for investor attention.

The real challenge is figuring out which option works for your business.

Here, we look at some of the most most popular options for early-stage startups looking to fund themselves…

What Is Startup Funding? 

Startup funding is a term used to describe how funding (money) is poured into a business to get it off the ground.

This funding can be used for a variety of things, whether it’s growing the team, marketing, product development, legal costs or just helping with the day-to-day.

The problem that startups – especially those in the early stages – have, is that they tend to lack any kind of trading history and rarely have good cash flow. This makes it harder for them to appeal to outside investors.

The good news about startup funding is that there are multiple ways to do it. The important thing is understanding how each option works, so you know what you are getting yourself in for.

The Most Realistic Ways To Fund A Startup 

Whilst many founders will pour their own personal cash into a business to get it off the ground, this isn’t always possible. Whilst some founders might stay employed alongside their venture to plug money into it, there comes a time when the new business demands all of their attention.

The good news is some other options exist. Here, we break them down…

1. Small Business Loans 

For many, it can be as simple as taking out a business loan, which is a form of financing offered by banks or lenders to help get businesses off the ground. Normally, these come with a level of interest.

Although a lot of high street banks and lenders do offer small business loans, these don’t work for all types of companies and can take a while to secure.

Banks will want to see your credit history, may ask you to have a personal guarantee or give evidence of revenue, which can be hard for early-stage businesses.

As a result, some founders might look at other loan options. For example, getting a second mortgage can be a way to unlock more money, however it does come with the added risk of property repossession if repayments are missed.

When it comes to small business loans there are a few pros and cons:

Pros

• You don’t need to give away any equity in the business.
• You know when you need to make repayments.
• You can access a big chunk of capital in one go.
• It’s a great option for founders with a strong credit history.

Cons

• Many banks won’t lend to startups as they view them as high risk.
• Interest on business loans can be high, adding extra pressure.
• These loans, if secured against property, put your other assets at risk.

Business loans therefore are best for founders that feel confident in their ability to generate revenue and have businesses that generate cash flow early.

2. Family and Friends 

Asking your family and friends for money might sound like something you want to avoid, but as a new business this is a common way to get off the ground.

Family and friends may put money in the business in exchange for equity, a revenue share, or just as a loan whilst you get off the ground.

That said, mixing money and relationships doesn’t always go to plan, so it’s always best to approach it with transparent terms and a contract in place.

The pros and cons of asking family and friends are:

Pros

• Faster way to get funding.
• Paying it back can be more on your own terms.
• No interest, releasing some pressure.

Cons

• Can affect relationships if things go wrong.
• Still has to be approached like a formal agreement, which can be uncomfortable.
• Difficult conversations if you can’t pay it back.

Because if this, it’s probably best for businesses that need flexible funding, with strong open relationships that can navigate any turbulence.

3. Equity Investment 

Equity investment is a term used to describe raising money from a venture capitalist (VC) or angel investor in exchange for a share in the business.

This is normally achieved by pitching the startup to a group of investors. If they like the idea, then they inject funding into a startup in return for a share in the company. This can also be helpful if the investors are experts in a specific field, as they could become useful assets for the company.

However, giving away a portion of your business means having to take on the opinions of investors, which can be tricky if any disagreements rear their heads.

Not to mention this is a highly competitive way of fundraising, with very few companies actually achieving a raise in their early days.

The pros and cons include:

Pros

• You don’t need to pay the money back straight away.
• Investors don’t just come with money, they also come with advice and expertise.
• Having the right investor on board can increase credibility and make it easier to bring on other investors in the future.

Cons

• You have to give up a piece of your business.
• Investors might want to be hands on, meaning founders have less autonomy.
• Fundraising in this way can be very time consuming and competitive.
• Investors usually come with pressure for quick growth.

This type of funding is probably best for businesses looking to scale fast and raise bigger funding rounds at later dates.

4. Business Grants 

Business grants are provided by the government as a way to boost entrepreneurship in the UK.

There are a few different grant types available including:

Government grants – offered directly by the government to support growth in certain areas.

R&D grants – designed to help boost companies that are developing new tech.

Sector specific or regional grants – designed for specific areas or key sectors.

Export grants – designed to help businesses boost international trade.

The big benefit with business grants is that they provide funding that doesn’t need to be paid back or accepted in exchange for equity.

The bad news? They are incredibly competitive, lengthy to secure and normally come with a need to provide a bullet-proof business plan.

Some pros and cons include:

Pros

• You don’t need to pay them back or give up equity.
• Can help boost credibility.

Cons

• Very competitive to apply for and secure.
• Funds might come with strings attached about how they are used.

For this reason, business grants are best for startups working in specific regions or sectors that focus on innovation or sustainability.

5. Crowdfunding 

Crowdfunding platforms in recent years have massively grown in popularity, and it’s clear to see why.

Instead of pitching to an investor or asking family and friends to put money in, crowdfunding allows businesses to put their funding rounds online and drive investment from a wider pool of people.

This has 3 main benefits.

1. The startup can get the funds it needs from a big group of people, meaning none of them can act as a major investor.
2. It helps build a community of investors and therefore loyal customers.
3. It allows them to promote their business to a large group, meaning they get both the marketing benefit and the financial benefit.

However, whilst a successful crowdfunding campaign can set a business up for funding success, a poorly executed one can leave it open to failing fast.

Because of this, here are the pros and cons:

Pros

• Helps with brand awareness and building a customer base.
• Shows real demand.
• Multiple small-time investors, not just one big one.

Cons

• Is very time-consuming, as it needs a lot of marketing promotion.
• No guarantee of actually getting to your funding goal.
• Public campaigns can give your competitors a chance to cotton on early.
• Platform fees can be expensive.

Because of this, crowdfunding is usually a good option for B2C startups with a strong community to draw on.

Choosing The Right Option For You

No funding route is a one size fits all solution. Each of them comes with their own trade-off in terms of control, the speed of getting the money in the bank and long-term financial pressures.

The most important thing is choosing the right route for your business, otherwise the wrong funding can be a costly mistake.