Fund Your Business Idea: 5 Common and Unexpected Options

Do you have a great business idea you’ve wanted to pursue for a long time? What’s stopping you? Likely fear of the risk is part of it, but finding ways to fund your business idea may be a big part of your hesitancy. There’s no business idea that can be successful without funding.

You can launch it from your garage like Steve Jobs did when starting Apple Computers, but for it to grow, you’ll need employees, office space, a website, materials, and eventually money to pay your monthly rent. To really get your business off the ground in the early startup days, most entrepreneurs and businesses require at least a little bit of funding. But how do newbie entrepreneurs and startup owners do it? The most obvious choice is to get a business loan from traditional lenders, but if that fails, there are many alternative funding options available to fund your business idea.

Necessary pre-funding needs

Before you can seek ways to fund your business idea, you need to flesh out your idea, so you have concrete elements to show prospective investors. Here are a few things you’ll need:

• A realistic business plan built on data and research, consisting of these elements
  • Your value proposition
  • A set of goals and objectives based on a review of market conditions
  • Plans for achieving your goals, fleshed out for at least five years
  • Realistic financial projections built on data and insights
  • An exit strategy aimed at investors or a payback strategy for lenders
• Market validation through test marketing, surveys, etc. This might include a prototype, a website template, and/ or a testimonial from prospective buyers.
• A use-of-funds statement
• Resumes for key startup personnel
• A pitch deck and an elevator pitch (a short statement of why investors should invest) for prospective investors

Once you have these elements, you might consider entering pitch competitions. While these won’t provide much funding (usually, there’s only a token prize), you can gain valuable feedback on your materials prior to trying to fund your business idea.

Options to fund your business idea

Once you’ve spent the time to do your research and put together these elements, you’re ready to consider your options to fund your business idea. In the next section, we’ll cover five options to fund your business, including:

• Self-funding
• Professional investors, like angel investors and venture capitalists
• Crowdfunding
• Loans
• Friends and family

Following this discussion of options to fund your business idea, we’ll discuss the downsides inherent in each option.

1. Self-funding

While it might not seem obvious, self-funding is the first option to fund your business idea you should consider because it offers the best solution to keep control and ensure you see the most profit from your venture. There are ways that make this a viable option, including:

• Pare down startup costs
• Start as a gig while maintaining your existing wages
• Clearing debt so you can fund your business idea more easily from your existing resources
• Making space in your residence for starting your business, if allowed
• Gain new skills

Paring down startup costs is a great way to fund your business, as it doesn’t require additional funding or limit the need for it. Leveraging (meaning getting the most from existing resources) is one way to reduce your startup costs. For instance, by starting with rented or borrowed assets (tools, space, etc), you avoid the high cost of buying them. While the total cost is higher, you only need a small monthly rent.

You might also consider less expensive operational models, such as using drop shipping, which doesn’t require you to buy and store inventory because the orders go directly to a supplier that fulfills them. Because you collect the revenue from the order and pay the supplier after the shipment goes out, you keep a portion of each order with less expense. I had an undergraduate student who was funding his education by doing this. All the expenses he incurred were for his website.

Bartering is another option to pare down startup costs. For instance, you might trade your design skills with an accountant willing to build your financial statements or maintain your business accounts. I once worked with a stall at a large farmer’s market to sell my jam in his store in exchange for free fruit, allowing him to keep part of the profits from each jar sold.

White labeling is another example of this, which involves selling a service that’s branded as your own rather than a product.

Starting your business as a gig allows you to keep your existing wages, which may allow you to fund your business idea from them or, at least, limit your need to draw a wage from your fledgling business.

Clearing debt means you don’t incur that drain on your resources, potentially leaving your money each month to invest in your business. As a last resort, you can use your available balance to fund your business idea.

Making space in your garage or a spare bedroom might reduce your need to rent or buy space, at least initially.

Gaining new skills means you’re in a better position to make sound business decisions and may allow you to effectively manage most business operations without the need to hire employees, at least for a little while.

2. Friends and family

In case your credit score isn’t good enough for the bank to lend you money (or you want to avoid the interest costs) or you can’t rely on your own savings, you can turn to your closest connections. This can be a potential way to finance your business idea, as they can provide you with funds at no-interest or low-interest payments without the hassle you’d have to face with other types of loans. Your family and friends will most likely look past your bad credit score and current account balances when determining whether you’re worth the investment risk. On the other hand, if your business fails, you risk ruining good relationships with your family and friends.

Recent changes in investment law now allow you to seek investors who don’t have the deep pockets once required of investors. This widens your potential for finding known investors. One of my clients once used this source after exhausting all other options to fund a successful business idea.

3. Professional investors

If a bank turns you down and you don’t have a rich cousin you could turn to, there are always angel investors. They are wealthy individuals who are looking to invest in promising and profitable startups in exchange for an equity stake in the new company. Angel investors can offer financing, while some even go further to provide guidance based on their expertise and experience. They are also willing to open many doors for your business by offering their contacts.

Most venture capital firms are essentially partnerships that invest company money, so they are pretty selective and invest only in businesses that have shown the ability to generate profits. These firms make direct investments in exchange for equity stakes in the business, and they do it hoping to sell their equity if the business gets sold to a larger business or holds an initial public offering. If your business requires serious funding, you should consider turning to venture capital firms, as they can provide you with larger amounts of money.

You commonly need a stream of revenue to gain the attention of venture capital firms. However, many universities and community groups host business plan competitions that allow you to share your business plan with a group of potential investors who choose to invest in companies with great potential, sort of like a “Shark Tank” opportunity.

4. Crowdfunding

Crowdfunding is done through crowdfunding websites and involves raising money from several small, individual supporters across the Internet. The crowdfunding process goes like this: you set up a campaign, name an amount of money you want to raise, and create certain perks for supporters who pledge a certain amount of money. Often, this involves offering a finished product in exchange for providing the funds necessary to build the product at scale.

The money is then raised over a specified period, and with some crowdfunding platforms, such as Kickstarter, you keep the money only if you raise the full amount you set as your goal. On the other hand, IndieGoGo lets you keep the raised amount for a cut of the proceeds.

5. Creative lending

There are various loan options available, including home equity loans, which let you borrow against your home’s value with flexible interest rates, and peer-to-peer lending, where you request a loan directly from investors without traditional banks, resulting in fixed monthly payments. With the near drought of federal loans through the Small Business Administration, these sources became more attractive. Additionally, online lenders provide quick loans at competitive interest rates, making them a popular choice for startup funding.

Many entrepreneurs are turning to these online platforms due to their efficiency and accessibility. This trend has led to a surge in innovative business ideas being funded rapidly. Moreover, the application process is often straightforward, requiring minimal documentation. As a result, small businesses can secure the necessary capital to grow without lengthy delays. Overall, the digital lending landscape is reshaping how startups approach financing their ventures.

Downsides to these options to fund your business idea

As you can see, the failure rate among startups is very high. Finding ways to fund your business ideas shouldn’t increase your chances. Each of these options to fund your business idea has a downside. Here are some of the most notable:

• Self-funding is often insufficient to fund rapid growth, resulting in slow-walking your idea. It also entails significant personal risk if the business fails.
• Friends and family won’t be very happy with you if they lose their investment. Also, you might find them attempting to influence your business decisions, creating conflict and the potential for leading you astray.
• Investors appear to provide free money. However, they expect to get their investment back quickly, often in five years, which means they care about short-term profits rather than taking a long-term view of business growth. This might mean undue influence leading to poor decision-making. Also, because you’re exchanging equity for their investment, it might cost you millions of dollars over time.
• Crowdfunding will cost you money for initial marketing campaigns to attract funders. If you fail, the public nature of crowdfunding might result in a public relations nightmare that makes it impossible to fund your business ideas in the future. You must also consider the administrative hassle of managing hundreds of small investors.
• Whether getting a loan from a traditional bank or one of the newer creative lending options, you’re required to pay off the principal and interest on a monthly basis. That means you have an additional drain on your monthly expenses. You’ll also need to put up collateral and meet eligibility requirements, which you might not have.

Conclusion

It takes a lot of effort and planning to find a way to fund your business idea. Consider all possible options, weigh the benefits and downsides of each, and determine which provides the greatest flexibility at the lowest cost. Of course, you don’t have to limit yourself to only one source of financing. Small businesses often start with money obtained from several different sources, and thanks to the rise of new funding sources, such as person-to-person lending and crowdfunding, there are many options to fund your business idea at your disposal.

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