Jasmine Birtles
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7 Innovative Ways to Secure Financing for Your Online Startup Journey
Moneymagpie Team
13th Mar 2024
Starting an online business is challenging, yet being a business owner can also be a significantly rewarding experience.
Few entrepreneurs have access to the capital that can launch and sustain a small business without outside help. Business costs range from market research to hiring and training employees, insurance, permits, software, etc.
There are many different ways to fund a business, and choosing the right one depends on your industry, ownership goals, and financial history.
The most popular financing options for small business owners include Bootstrapping, Loans, Equity investment (venture capital), Crowdfunding and Government grants
Let’s explore each financing option, how they work, and the benefits and drawbacks of each.
Bootstrapping
Bootstrapping, or self-financing, is the starting point for many e-commerce startups. This approach utilizes personal savings, credit cards, or financial support from friends and family. The primary benefit of bootstrapping is maintaining complete control over your business, since there’s no obligation to external investors.
When a business is self-financed, it can also reinvest any profits earned back into the business. This allows businesses to expand quickly to meet growing demand. The downside of bootstrapping is its potential limitations on the scale and speed of growth.
Loans
Loans are commonly used for a quick cash injection to open or grow a business. The upside of loans is that you don’t have to give up any equity in your company, as you would with venture capital or angel investing. The downside is that you will have to repay the loan with interest, and you may have difficulty getting a loan if your business is new or risky.
Which loans should you consider for your online business? Different types of loans exist to serve different business needs, from personal to government-backed and SBA loans.
Alternatively, family and friends can be a good option for borrowing money for your business. Nearly 40% of new businesses are financed in this way.
Vetting the various options and picking the right one is crucial for owners to secure their business’s long-term sustainability and scalability.
Personal Loans
Personal loans offer quick capital access, and unlike business loans, they are easier to secure, especially for new businesses lacking a credit history. The difference between personal and business loans is a matter of risk. The owner doesn’t guarantee business loans, therefore, if the business goes under, its assets are liquidated to pay off debts, while the personal assets of the business owner are left alone. On the other hand, personal loans are at risk of being used to pay off debts if your business folds.
If personal loans are your best financing option, compare personal loan rates and requirements before you settle on one. One example of an online loan platform is BestEgg, known for its streamlined application process and customer focus. Another is Upgrade, which offers flexible loan amounts and funding within 1 business day once you’re approved.
Government-Backed Loans
Government programs such as the Small Business Administration (SBA) offer loans to support many businesses. Government-backed loans are a unique form of assistance that provides an approved lender, such as a credit union, with a guarantee to back the loan. The benefit of this is the reduced risk for lenders, making it easier for small businesses to get approved for financing.
Small Business Loans
Getting a small business loan from a bank or online lender is a common way to raise capital for a new business.
Entrepreneurs need to provide a detailed business plan, financial statements, and information about the purpose of the loan. Lenders may also evaluate the borrower’s creditworthiness.
Once the application is submitted, lenders assess the risk and determine the loan terms, including interest rates, repayment schedules, and collateral requirements.
Venture Capital Funding
You have probably heard of venture capital funding and might wonder if this option is possible for your startup. While technically anyone can secure venture capital funding, it comes with caveats.
Venture capital is ideal for e-commerce businesses with high growth prospects. In exchange for equity, the investors provide substantial capital and often contribute industry expertise and valuable networking opportunities. However, accessing venture capital requires a robust business plan and readiness to share decision-making.
Crowdfunding
Crowdfunding platforms like Kickstarter and Indiegogo offer a unique way to raise funds. This highly accessible method validates your product in the market while generating capital. According to Kickstarter data, in just three months in 2023, more than 10,000 projects were launched, and around $140 million was raised.
While you can raise some money by creating a simple campaign, success in crowdfunding hinges on a compelling story and providing perks for backers.
Government Grants
Government programs often offer grants and loans to support small businesses. These funds often have specific requirements but are advantageous due to their non-repayable nature or low-interest rates. Entrepreneurs should research local and national programs to find suitable options.
How government grants work
- Eligibility: Grants and loans have eligibility requirements that must be met, and they can vary widely depending on the government agency and program.
- Purpose: Grants are typically awarded for projects that align with government priorities, such as research, community development, or specific industries. On the other hand, loans are more versatile and can be used liberally for business expansion, education, or housing.
- Cost: Grants are a form of financial assistance since they don’t require repayment. Loans, on the other hand, come with extra costs such as interest, fees, and collateral, which vary depending on the loan program and terms. Banks can also ask for personal assets to function as security on the loan.
- Competitiveness: Government grants are often highly competitive, and many applicants are trying to secure a very limited amount of available funding. Loans may have less intense competition but still require meeting specific criteria.
Startup Incubators and Accelerators
Incubators and Accelerators are unique programs that offer funding, mentorship, and resources. While competitive, they also provide significant advantages in terms of networking, expertise, and credibility.
Startup incubators generally cater to early-stage businesses, such as those without a proven product or team. On the other hand, Accelerators look for companies that are further along. They typically require a business to have a minimum viable product and an established team before they will get involved.
Some examples of incubators include:
- Founder Institute: A global network that helps companies at every level, from startups at the idea stage to developed companies with a product and customer base.
- Entrepreneurs’ Organization: A peer-to-peer network of founders and builders from over 60 countries.
- Harvard Innovation Labs: Harvard’s own entrepreneurial ecosystem of support for its students and alumni.
- Endeavor: A global organization focusing on businesses and startups in emerging and underserved economies.
- Plug and Play: A global platform that connects large, established companies with startups to promote innovation.
Making the Right Choice for Your Startup
Launching an online business requires careful consideration of financing options. Whether you choose to bootstrap, get loans, attract venture capital, crowdfund, apply for government grants, or join startup incubators, each path offers unique opportunities and challenges.
By understanding the nuances of each method and aligning them with your business goals, you can achieve sustainable growth and success in the dynamic world of online entrepreneurship.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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