We will go over a few financing methods, traditional and alternatives.
A method is a particular form or procedure to accomplish something, and in this case, we want to accomplish funding and all the financing that is needed to develop your startup.
Traditional methods involve banks and traditional investors. With the advance of technology emerged new alternatives like crowdfunding, alternative lending, and others that we will explore here.
Let’s start with the traditional financing methods first.
We say traditional methods because they involve banks which are the oldest way to get funding for a project with loans, micro-credits, etc.
1. Bank Loans
This is the most traditional method. Basically, you look for credit in the bank. This method is one of the most structured and you need to comply with many requirements.
For example, you should have a good credit score. If you have debts or pending loans, it makes it more difficult to get money from the bank.
In addition, if you want a bank loan you will have to present a complete business plan with detailed financial projections.
Usually, bank loans have legal regulations and these are other requirements you need to follow.
This method is one of the oldest, and rarely used by startups.
Common requirements for Bank Loans are:
• Good Credit score of the owners.
• Many banks require that the business shouldn’t be new, that at least has 1 or 2 years of establishment
• Many banks also require that you have at least account with them, and many times that this account has more than 1 year.
• Leasing agreements
• Ongoing contracts
2. Credit Cards
This is a more common method, especially when entrepreneurs need money fast.
In this financing method you only need a credit card with enough credit limit in hand and use it to pay for things at the beginning of your entrepreneurship.
But we don’t recommend this method, because it’s rarely insufficient for starting a business, generates too much interests, and naturally credit cards can lead to bad financial decision. For that reason, all banks have loan programs, micro credit program, even financing programs forentrepreneurs.
3. Government grants and loans
Depending on the country you’re in, it’s possible to get financing from the government in a kind of microcredit or a grant.
This would happen if your business idea contributes to a particular program that country is investing it.
For example, the US Agency for International Development that has many programs where you can participate in getting a government grant. One of their program it is the Development Innovation Ventures, National Telecommunications &Information Administration Programs, Corporation for National and Community Service, where you can apply for grant programs like AmeriCorps, Social Innovation Fund, etc.
In this case, you need to fulfill legal requirements that will be unique for that government, and eventually, you will have adhere to the rules and requirements of that government.
4. Lending Companies
These companies bring lending, but they are more dynamic and modern than a bank. The main feature of this method is the fact that they don’t have as many requirements, and usually provide online registration forms to check availability for capital.
These lending companies support small business and startups, by providing funds for projects.
Some examples of these companies are Lendio and Kabbage.
5. Nonprofits and Foundations
These organizations are famous for bringing money or investment to an audience, usually minorities. It could be for women, populations of specific religion or race, etc.
An example here in Miami is the Miami Bayside Foundation. They bet “to advance economic development in the city through support of minority business and education”.
They have a loan program, and also an educational scholarship program in the city.
Now, It is time for alternative financing methods
Ok lets get to the good stuff. On the other side of traditional methods, alternatives are related to people, websites, and every non-bank institution that can bring money to your startup.
These methods are newer than the traditional, but they are very popular in the startup culture.
1. Friends and family
Some entrepreneurs think that everything should stay in the family .Maybe you are one of them.
That's why the first alternative method that we consider to get the funding is the lending by friends and family.
Since these people are so close to you, this transaction is less formal, doesn’t have many requirements, and in general, make a good and beneficial engagement.
2. Venture capital
When a group of people unite their resources, invest their money in a startup and take part ownership in exchange for their capital, we will bein presence of a venture capital group or firm.
These groups invest their money on new technologies, and they also commonly have a seat on the board and are integral in the business management of the startup.
If you apply for this kind of method you should know the methods that Venture Capital use for lending money.
For example, a term sheet which is an important document where the Venture Capital (VC) firm indicate that has the intention of invest and make all diligence for preparing and concludes with the definitive financing document.
A term sheet includes information like the valuation of your business, the composition of the directive group, the rights the investors will have before and after of the financing, etc.
Other instruments you should know are SAFE.
The first translates Simple Agreement for Future Equity (SAFE).
The SAFE investors make an investment in cash and this is changed for stocks in the company in future financing round or discounts.
A SAFE doesn't generate interests and it is very useful for business in very early stages.
If you are in Miami or in the US, there are some options for Venture Capital firms.
4. Angel investors
Angel investors are similar to venture capitals, but they have their differences. For starters, venture capitals are a group of large company while angel investors are individual investors.
Angel investors are individuals with economic resources that bring capital and advice to entrepreneurs. It is a financing method more personal.
With this method, you can get funding from websites where investors can support your business no matter where they are.
These platforms were thought for receiving investment from many individual investors that can be anonymous too.
You can do crowdfunding for different reasons like early access to products, a prize, swag, etc.
Some websites you would use for this financing method are Kickstarter, which is one of the most used, Indiegogo, GoFundMe, and Republic.
Some accelerators will invest in your company for exchange inequity. Along with equity, accelerators include a program to help your startup accelerate. While this funding can be necessary at the beginning, it can be a significant amount of equity that you give up for this capital and program.
We created Navigate as a new kind of startup accelerator that doesn’t take any equity, isn’t cohort based, fully virtual tailor made program where we match you with a dedicated advisor to help you launch, grow, or get funding ready.
To learn more book some time with us here.