There's No Such Thing as Free Lunch: How to Choose the Best Fundraising Option for Your New Business - Entrepreneur

There's No Such Thing as Free Lunch: How to Choose the Best Fundraising Option for Your New Business - Entrepreneur


There's No Such Thing as Free Lunch: How to Choose the Best Fundraising Option for Your New Business - Entrepreneur

Posted: 05 Oct 2020 07:00 AM PDT

10 min read

Opinions expressed by Entrepreneur contributors are their own.

One in four U.S. businesses are not able to obtain the funding they want, according to a survey by the National Small Business Association. Funding can be a maze for even the most experienced of entrepreneurs, who need to choose from multiple paths—each with its own risks. Ideally, you'll seek the solution that's best tailored to your business needs but also to your personal financial status.

Every source of funding comes with its own specific costs. There's cheap money, and then there's expensive money. Each option takes a different amount of time, requires giving away a different amount of equity, and has a varying level of risk involved. Be sure to do your research, assess your runway and money management skills honestly, and look at your competitors for a general sense of how to successfully raise funds in your industry.

Here are the most common funding routes for startups, plus tips and insights from seasoned investors:

RELATED: Sign Up For a Risk-Free Trial of Our On-demand Start Your Own Business Course 

Revenue from customer sales

The least expensive form of funding is customer sales. It's a form of revenue that you don't have to give back to anyone, and you don't lose a portion of control over your business in the process. Naturally, the hard part is generating sufficient revenue from sales on a regular enough basis to keep your operations ticking over. Still, it's a popular choice for many founders who see early positive traction and have sound financial projections. You could even opt to sell your product or service before it's officially launched in order to cover any expenses you incur in the construction phase.

Pros: Don't have to pay money back or give up equity

Cons: Difficult to generate enough money to sustain operations

Difficulty: Medium - leveraged through early profit

Business type: Subscription-based companies, pre-sale models

Personal debt

Business loans, credit cards, and lines of credit account for roughly three-quarters of financing for new businesses. In fact, it's unusual to meet an entrepreneur who hasn't gone into debt starting their company. Most investors want to see that you have skin in the game, meaning that you've personally contributed to your own business - whether that's opening a new credit card, borrowing against your retirement savings or against your home. 

Personal debt is high risk, high reward. The advantages are that you don't have to give up equity and you have total control of the funding as the money you borrow is attached to you personally. That is also the downside. If your business doesn't perform as you expect, you are the person who loses out. Compared to other funding options, where everyone loses out in a poor performance scenario, personal debt is a heavier burden to carry. You also won't be paid back for your personal investment as you can't raise money to cover that debt.

Ramin Behzadi, general partner at 7 Gate Ventures, notes that personal debt is typically used to maintain the status quo in a company and not for immediate short or mid-term growth—that comes from equity rounds.

If personal debt is the right funding path for you, check in advance that your credit score makes you eligible for the amounts you'll be requesting, and speak with a financial advisor before committing to new lines of credit. 

Pros: Don't give up equity and it shows investors you have skin in the game

Cons: Debt is tied to you personally and you can't raise money to cover the debt

Difficulty: Medium- leveraged through financial institutions but dependent on personal credit history

Business type: Various

RELATED: Sign Up For a Risk-Free Trial of Our On-demand Start Your Own Business Course 

Government and bank loans

Getting a government-backed loan is a good funding route but be aware that you'll have to jump through some hoops. These types of loans aren't particularly common and typically only apply to founders who have lots of assets or income. They also vary in amount and conditions, so you have to find information from your local economic agency to suss out if it's right for your startup. The U.S. Small Business Administration is useful for local-level government funding, as is the State and Territory Business Resource.

Gabe Zichermann, chief executive of Failosophy, suggests that if you want to secure funding via a bank loan, identify the bank that you have the closest relationship with and ideally where you have all your accounts, so that they can see your financial position. As well as offering a standard business loan, bank credit processors can also provide financing where you borrow money against your projected revenue streams. This option is preferable for startups that have recurring revenue but can't raise capital, for example, restaurants, retail stores, and wholesalers.

"Bank loans have the same benefits as personal debt in terms of keeping equity and control, but they often aren't viewed favorably by venture capitalists," Zichermann adds. If you have debt on your company books when approaching investors, they'll know that they aren't your primary payback group and may think that the money they give you would only be used to repay the bank.

To listen in to Gabe Zichermann and Ramin Behzadi discuss different options to find funding for your business sign up for a risk-free trial of the Start Your Own Business course and check out our live webinar on 10/07 at 3 pm ET.

Remember, any loan you receive will have interest rates, so you'll eventually pay back more than you took out. If you can't afford the extra amount, consider looking to friends and family for investment.

Pros: Keep equity and control, and can borrow against projected revenue streams

Cons: Hard to obtain, will be off-putting for venture capitalists

Difficulty: Low -leveraged through formal financial institutions but dependent on location and early traction

Business type: Startups with recurring revenue like restaurants, retail stores, and wholesalers

Friends and family

Raising money from people who know you is a relatively safe choice for founders. Most of the time, friends and family don't have to be sold on your business because they are investing in you, and simply want to help your company grow. They are also less likely to request ownership in your business. However, you may feel a stronger obligation to return their capital because of the relationship you share with them. This option is lower risk than others, but can be higher pressure.

To get started with investment from friends and family, make a list of the people who have money, would be most interested in your idea, and organize a time to pitch them your business. 

Pros: People invest in you personally, they don't have to be sold on your business

Cons: Greater obligation to pay people back

Difficulty: High - leveraged through personal network

Business type: Various

RELATED: Sign Up For a Risk-Free Trial of Our On-demand Start Your Own Business Course 

Angel investors

For startups, angel investors are often the ideal pathway to funding due to their more "human" touch and hands-off involvement in businesses. Angels tend to work on a case-by-case basis, so they can be more generous with their investments, plus more flexible about returns and equity. The catch is that angel investment is often the result of a serendipitous meeting, meaning it can take anything from days to years to find.

Nonetheless, there are ways you can boost your exposure to angels through networks like AngelList, as well as browse investor groups by location, university, and cultural representation. Zichermann recommends finding angels that have experience in your industry and overlap in your circles of interest. He also notes that if you need to continue developing your business while you search for investors, accelerator programs can expose you to lots of angels. But keep in mind that some programs will ask for equity in exchange, meaning you'll give up some control for the privilege of being seen. 

Pros: More flexible about returns and equity, less risky than business loans

Cons: Hard to find suitable angel investors

Difficulty: Medium - leveraged through personal and professional networks

Business type: Various

Crowdfunding

One of the newer options for fundraising, crowdfunding is best-suited to companies that have a physical product. Crowdfunding means you don't have to give up equity or accumulate debt, you can earn social proof as you collect investments, and you can build a pool of loyal advocates for your product from the get go.

The downside is that crowdfunding requires a lot of time and effort to launch the campaign itself, and once it's live, you have to continuously market it. You also have to deal with a number of investors at once, which can be taxing when you're busy running the company. For these reasons, crowdfunding is a longer route to funding and not one that high-growth startups typically use, but it has proven to be very effective for early-stage companies.

Pros: Don't have to give up equity or accumulate debt, earn social proof as you fundraise

Cons: Requires time and effort to launch campaign, have to work with multiple investors

Difficulty: High - leveraged through crowdfunding websites

Business type: Industries with physical products

Venture capitalists

The last and most expensive fundraising choice is to turn to venture capitalists (VCs). This is far more exclusive than the other options listed, and primarily applies to startups in technology, biotechnology, and clean technology spaces.

For perspective, 1,500 startups get funded by venture capitalists in the U.S. every year, compared to the 50,000 that get funded by angel investors. VCs can offer significant investment amounts and years of expertise—which is what makes them so appealing—but they also expect a lot more control over your business. Some VCs will even appoint their own board of directors within your company.

Related: Sign Up For a Risk-Free Trial of Our On-demand Start Your Own Business Course

Similar to angel investors, if you want to move forward with VC funding, you have to target firms that invest in your stage, industry, and ideally, have a shared connection with someone in your current network. Warm introductions are the best stepping stone for VC funding, and pitch competitions are valuable too. Behzadi suggests that a "warm introduction can be initiated from a person within your immediate connections/relationships or it could be cultivated or made with some proper efforts."

Likewise, Kevin Lavelle, senior vice president at Stand Together, says "you should look for a healthy balance of intellectual humility about the challenges of growth consumer investments, and intellectual curiosity about the space." 

Keep in mind that obtaining investment from VCs firms takes a long time, normally around one year in total.

Pros: Higher investment amounts, expert knowledge and connections

Cons: Expect greater control in your company, takes a long time to organize

Difficulty: Low - leveraged through events and network but dependent on industry and profit

Business type: Technology, biotechnology, and clean technology spaces

Before charging ahead with fundraising, think carefully about how different pathways can accelerate your company's vision, and what you might have to sacrifice in the process. Don't feel pressured to accept the first funding offer that comes your way when there could be a smarter route for you. The investment you accept will ultimately be a reflection of what you expect and want for your company.

Can you get a business card without a business? - Bankrate.com

Posted: 11 Dec 2019 12:00 AM PST

Business credit cards offer some unique perks you can't always get with personal credit cards, as well as bigger bonuses and better rewards categories in some cases. As a result, it's easy to become entranced by all the top business credit cards on the market today. But, what happens if you don't have a business to help you qualify?

Here's the good news: You don't have to have a traditional "business" or own a major corporation to get approved for a business credit card. You just need to be earning some money independently, which is pretty common in today's gig economy. If you don't have an employer identification number (EIN) for your side gig, you can even apply for a business credit card as a sole proprietor. Here's what you need to know to apply for a business credit card.

Requirements for a business credit card 

Still not convinced you have a business? You may be more of an entrepreneur than you think. Pretty much any income-producing hobby you have could be considered a legitimate business provided you're doing something to earn money.

Some examples of non-traditional business ventures that could help you qualify for a business card include:

  • Running a dog-walking business in your neighborhood
  • Buying and selling on eBay
  • Working as a virtual assistant or an independent contractor
  • Driving for ridesharing apps like Uber or Lyft
  • Delivering food with app-based companies like DoorDash or GrubHub
  • Tutoring kids in-person or online
  • Buying and selling antiques
  • Independent consulting work
  • Selling homemade items on Etsy.com or Facebook Marketplace

These are just some of the examples that can help you qualify for a business credit card, but there are plenty of others. The point is that pretty much any time you're pursuing income on the side can qualify as a business — at least when it comes to qualifying for a business credit card.

Why get a business credit card instead of a personal credit card?

There are a variety of reasons to pick up a business credit card for your side gig, many of which may not be obvious right off the bat. Here are some of the most important ways a business credit card could leave you better off:

  • You could earn rewards on business-related spending. Chances are good you have some business-related expenses you could be earning travel rewards or cash back on. As an Uber or Lyft driver, you cover your own gas and maintenance and repairs on your car. If you're selling crafts on Etsy, you have supplies to purchase. Not only can you earn rewards on regular spending with a business credit card, but you could also earn a big signup bonus by meeting a minimum spending requirement within the first few months of account opening.
  • You can keep personal and business spending separate. If you have considerable business expenses to keep track of, it can help to have a separate business credit card. Doing so will make it easy to keep track of all your business purchases throughout the year. Plus, your purchases will all be separate from your personal spending and easy to account for come tax time.
  • Build your business credit score. While your personal credit score is considered when you apply for a business credit card, you also have a separate business credit score. Business credit cards report your credit movements to the commercial credit bureaus, which can help you improve your business credit score over time.
  • Business perks: Many of the top cards for business offer different perks than personal cards. The Ink Business Preferred Credit Card, for example, gives cardholders cell phone insurance when they use their credit card to pay their bill. With The Business Platinum Card® from American Express, on the other hand, you can qualify for a credit up to $200 toward Dell computers along with other perks. These are just a few examples, but there are plenty more.

It's clear that there are plenty of advantages that come with getting a business credit card, but there are a few potential downsides. For example, business credit cards with the most perks can charge annual fees up to $595. That can be a lot to handle if you don't use your credit card's perks often. However, you should note that there are plenty of lucrative business credit cards with no annual fee required, too.

Aside from that, having a business credit card means having yet another bill to keep up with. If you run your balance up and can't pay it off, your business credit card could also lead to more late fees and more interest charged. At the end of the day, it's always best to use a business credit card for convenience with the goal of paying your balance off each month. That way, you're benefiting from rewards and cardholder perks without paying for the privilege.

How to apply for a business credit card

Applying for a business credit card is easy. If you have a registered business, including an LLC, you'll simply apply using your business information, including your Federal Tax ID number, which is also called an Employer Identification Number (EIN). If you run your business without a formal business set-up, you can simply apply as a sole proprietor with your Social Security number instead.

Either way, you should plan to offer up the following information:

  • Your annual business income
  • The length of your business since inception
  • The industry your business is in
  • Your role in the company
  • How many employees you have (if any)
  • Your business address, even if it's your home address
  • Your business phone number, even if it's your personal phone

It's possible that, after you apply, you'll need to mail in some supporting information to prove you have a business. This may include information from the Internal Revenue Service (IRS) that proves your Tax ID number, or perhaps income information. You may also be approved automatically without any questions at all, however, so don't let that be a deterrent.

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