Learn about the different types of funding available to entrepreneurs in the US who want to start or grow their businesses.
To many foreigners who hope to start a business in the United States, the funding landscape may seem quite unique (and confusing). Depending on where you are in your company’s development and your future goals, there are a variety of different options for getting the cash you need to grow, each with their own pros and cons.
This brief overview will provide the basic information you need to dig deeper and find the best funding for your business.
Types of business and startup funding, explained.
Here are the most common types of funding you might use for your growing business.
Debt funding (i.e., SBA/bank loans, lines of credit, etc.)
Debt funding, also referred to as debt financing or debt lending, means taking out a loan to fund your venture. The Small Business Administration (SBA), a US government agency, works with many banks and lenders to provide loans at great interest rates to support small businesses. You can access capital with terms that depend on your business model and demonstrated revenue/profits. You can also get a loan or line of credit from a bank if you have been in business for a while and can prove you will be able to pay back the loan (i.e., you have good business credit).
Pros of debt funding
You are not giving away any equity (more on that below).
Can help when you need to buy or invest in equipment.
Cons of debt funding
Usually not an option when you are a startup and don’t have enough revenue or clients to show a bank that you will be able to thrive and pay back the loan.
Crowdfunding/equity crowdfunding
Crowdfunding is popular for many startups who need capital upfront to manufacture their products. Regular crowdfunding (like Kickstarter) relies on potential customers who want to support your efforts enough to pay for pre-orders or even “donate” to your cause. Equity crowdfunding is more regulated, and anyone can participate (typically with a low minimum investment). In return, investors get a share of your company. Sites such as WeFunder provide this kind of service.
Pros of crowdfunding
A great marketing tool to test your concept (and prove it works).
Gets the public to know your name and products as you start building your customer base.
Cons of crowdfunding
Contributions are usually small. Depending on how much you want to raise, if most investors give $100 or even $1,000, you may need a lot of individuals to contribute to meet your investment goal.
Angel investors
Angel investors may invest as individuals or as a group through various vehicles. There are some rules about being an “accredited” investor in terms of minimum annual income or assets owned. The screening process may vary from group to group, and in many cases, you have to be recommended by a group member. Amounts raised from angels are typically lower than venture capital, and angels will ask for a certain amount of equity in return for their investment, meaning you are giving up some of the ownership in your company.
Pros of angel investments
Very popular for early stage funding.
Some angel groups support minority entrepreneurs: for example, Golden Seeds invests in women-led startups, Gayngels in LGBTQ founders, etc.
Cons of angel investments
The due diligence process can be lengthy before the group decides to move forward and invest in a venture.
Some groups may only entertain ventures in certain sectors.
It may be hard to access a group unless you are recommended by a member.
Accelerators
Accelerators help established businesses grow faster (as opposed to incubators, which help get businesses up and running). There are many different accelerators available, based on the sector and stage of the company. While some have great reputations (like Y Combinator, Long Beach Accelerator), many accelerators are also in the business of making money off startups, hoping to find a unicorn among the many startups they invest in. Make sure you do your research and talk to previous accelerated ventures before you join.
Pros of accelerators
Not only access to funding, but also to workshops, resources, and mentors to help you succeed.
Powerful networking opportunities.
Cons of accelerators
The cohort model (where several startups follow the same path and curriculum) may not be as effective in making progress on your personalized needs.
Success often relies on the quality of the advisors and mentors, and their ability to get you to the next level. It’s therefore very important that you pick the right accelerator if you choose this route.
Venture capital (VC)
Venture capital funding may be more typical in later stages, even though some VCs are focused on early-stage funding. Like with angel investors, VCs will take part of your company (i.e., equity). They invest because they believe you will be successful, so they can make a big return on their investment.
Pros of venture capital
You may be able to raise a significant amount from a VC, even at an early stage.
VCs bring expertise and connections from their network and help with fundraising in following rounds.
Cons of venture capital
VCs will want a minimum amount of equity for their efforts to be profitable.
VCs like to shape the direction of the venture, often with board seats and may want to have some control over the company, which means as the founder, you may have to shift your expectations and goals.
Grants
While grants are a traditional funding vehicle for nonprofits, many foundations and governmental agencies also offer grants to for-profit startups. The SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) grants commonly provide funding for science-driven ideas and companies with the goal of stimulating technological innovation.
Pros of grants
Sizeable, non-dilutive amounts (you don’t give up equity and don’t have to pay them back).
Free money, as long as you follow the grant reporting requirements.
Cons of grants
Grants can be unpredictable on success.
May have stringent requirements (i.e. who can be a principal investigator or PI).
You may need to hire an expert grant writer to guarantee your best chances.
The process can be lengthy.
Grants can be a great funding source, but you should also pursue other sources.
Author : Isabelle BART