by Jennifer Lonoff Schiff

8 Strategies to Fund Your New Business

Nov 03, 20146 mins
Financial Services IndustryIT StrategyVenture Capital

Entrepreneurs and small business experts share their advice on the best ways to raise money to finance a new business or product.

bus funding thinkstock
Credit: Thinkstock

As many first-time entrepreneurs know, or have found out, getting a traditional bank or even an SBA loan to start a new business isn’t easy. So where else can you go to fund your dream? Fortunately, today entrepreneurs have many options than ever when it comes to funding their new business or business idea, many of which are less difficult to obtain and less expensive than a bank loan.

Here are eight strategies for financing a new business, product or service.

1. Bootstrap — and use credit cards with no or low interest rates. “Scrape together all your loose cash, savings bonds, etc. and figure out the cheapest way to make a minimum viable business or product,” says Megan Cox, founder & CEO, Wink Natural Cosmetics. “I was able to create Wink, including the first product run, for under $2,000.”

“Leveraging 0 percent credit cards is the best way to fund your business since there is no interest to pay,” says Vladimir Gendelman, founder & CEO, Company Folders, which creates and sells innovative presentation folders. “I was able to borrow almost $50,000 to start my company, using VISA, MasterCard and Discover cards. It took me about four years to pay everything off, but I didn’t pay a penny in interest.”

2. Ask friends and family for a loan or angel investment. “If have a network of friends and family with money to invest in your idea, start from there before going to angels, incubators or VCs,” suggests Simon-Pierre Behr, co-founder and vice president of sales and marketing at SpotLight Parking. “Focus on those that are the closest to you and have the deepest pockets. Those are the two most important characteristics you should consider, because these people will not try to get involved in your operation, will spread the word within their networks and aren’t looking for high returns,” he explains.

3. Crowdfund. “Through crowdfunding [sites like Kickstarter and Indiegogo], you can get the support of thousands of investors,” says Sandeep Sood, founder & CEO of Monsoon, which designs, develops and markets mobile and Web applications. “What’s more, these investors may not even be interested in acquiring equity in your company. It’s likely they’ll happily fund you simply because they’d love to get their hands on your product. In fact, they’ll be so eager, they’ll even pay for your product months before it’s available.”

“We launched the Less Mess Happy Mat via Kickstarter and raised $72,721 in 30 days,” shares Lindsey Laurain, founder of ezpz. “I believe Kickstarter is an excellent way to raise capital, introduce a product to market, garner feedback and gain grass roots support. Getting the money up front is huge,” she says. Thanks to Kickstarter, ezpz got the cash it needed to fund its first large scale production run — and advance interest in the product.

4. Run a pre-sale. “After creating the Bare air-free baby bottle concept and showing it around, many suggested I try crowdfunding to fund my venture,” recalls Priska Diaz, founder & CEO, Bittylab. However, “as innovative as my idea was, it didn’t get funded.”

Discouraged by her Kickstarter experience, Diaz decided to try doing a little crowdfunding on her own website, hosting a presale — and advertising it with modest PR funds. “This way, I benefit from the traffic; I keep 100 percent of the funding; and I could pass the savings along to potential customers,” she explains.

The result: “At the end of the presale, I had 10,000 newsletter registrants, 8,000 unique visitors per month, viral PR and raised $50,000, which paid for inventory.”

5. Consider a peer-to-peer lending site. Peer-to-peer lending sites such as Prosper allow entrepreneurs to borrow up to $35,000. However, loan rates vary and can be as high as 34% APR for borrowers considered a credit risk. (At the time of this writing, the lowest APR for “best borrowers” was 6.73%.)

6. Take out an alternative small business loan. “An alternative small business loan is [a] quick, simple alternative to a bank loan,” says Eduardo Herrera, chief communications officer, Liberty Capital Group, which provides small business funding. “Because these types of loans are primarily revenue based and require as little as three months of financial activity, potential borrowers can easily overcome common hurdles such as credit and time in business.”

How does it work? “Collection is automatically drawn from the merchant’s checking account in daily or weekly micro-payments, freeing up working capital and alleviating the end of the month cash crunch,” he explains. “With terms ranging between 3 to 24 months and renewal of credit mid-term, businesses consider it a line of credit.”

The main caveat: these loans can cost more than a traditional bank or SBA loan.

7. Join an accelerator or incubator. “Look up startup accelerators [or incubators],” suggests Cox. Most give between $20,000 and $120,000 cash or convertible debt for a small percentage of equity in your company. They are all over the world, but [many are] concentrated in the U.S.”

Being part of an incubator “is a great way to learn about how to grow a business, and most importantly for new entrepreneurs, to learn how to approach and pitch investors,” says Rick Morrison, CEO, Comprehend, which offers cloud-based clinical data insights tools that improve the way clinical researchers access, understand, explore and analyze data. “We took investment from Y Combinator in January 2011. Besides the three month program where we listened to insightful off-the-record talks by established entrepreneurs and VCs, they provided perspective and advice throughout the several years since,” he explains.

8. Participate in a small business competition (aka a local Shark Tank-type event). “With the Shark Tank phenomenon sweeping the nation, more and more local city and state organizations are hosting events that allow businesses to pitch to [potential] investors and receive monetary prizes,” says Nikki Hynek, CEO, Dollup Beauty, which sells stylish makeup organizers. “Our business recently competed in and won $12,000 in angel investments at an Invest In She event in Cedar Rapids, Iowa, by pitching our cosmetic accessory, the Dollup Case, to a panel of four investors,” she continues. “Not only did we receive a monetary investment, but we were connected with investors who were willing to help us grow our business.”