Funding Your Startup

Big ideas don't prosper on their own. If you want to build a startup that stands the test of time, you'll need more than a smart idea and a solid work ethic: you will also need adequate funding. Whether you're hoping to be the next YouTube or buy a food truck, this guide offers insider tips on financing that can help you get your startup up and running.

Alternative funding options run the gamut, from tapping into your own savings to getting help from angel investors. Contrary to popular belief, less than 1% of startups receive venture capital funding, at least in their earliest stages.

Here are some of the alternative funding sources to consider as you look for ways to get your idea off the ground.

For alternative funding sources, you may first want to turn to friends and family — or even yourself.

If you have enough funds in your savings account, you can use it to fund your own business pursuits. The benefit of this strategy is that you won't have to take out a loan. However, if your business fails, you can expect your financial investment to disappear along with it.

If you can't qualify for a traditional business loan, a business credit card is a smart alternative. With a business credit card, you can secure your own flexible microloan. You will, however, need to personally guarantee repayment and pay high interest rates. "I absolutely recommend that you get a business credit card instead of using your personal card, because it clearly delineates your business expenses versus personal expenses," said David Ehrenberg, founder and CEO of Early Growth Financial Services, a San Jose-based company that provides financial services and assistance to private venture-backed startups.

With business loans hard to secure, funding from family and friends is often more readily available. If your loved ones believe in your business venture, they might be willing to loan you the funds you require. Just make sure to get your agreement and repayment plan in writing.

If you're unable to draw on personal savings and your immediate network, you may need to look into some innovative ways to get started. Here are a few ways to secure funding outside of traditional loans:

Some small businesses are eligible for grants available through organizations like the Small Business Administration (SBA), although requirements can be strenuous. The SBA's grant search tool can connect you with options that might work for your startup.

Peer-to-peer lending firms like Lending Club and Prosper have become increasingly popular for business owners and aspiring entrepreneurs who cannot secure funding elsewhere. With this type of borrowing, your lender is comprised of individual investors who fund your loan. You may be able to qualify with bad credit, but you'll get a better interest rate and loan terms if your credit is better than average.

Whether offered through the SBA, a private local lender or a government program, microloans can provide you with the rush of funding you need for various stages of business growth. While microloans are generally for less than $50,000, they can serve as a lifeline for your business if secured at the right time.

Crowdfunding websites like Kickstarter and Fundable are helping business owners and startups get off the ground all over the nation. While nearly anyone can apply for funding through one of these methods, a solid history is generally required to receive meaningful amounts of funding. Remember that anyone can throw up a GoFundMe page; if you truly want to get started through crowdfunding, you need a solid business plan to share.

When it comes to securing a large amount of money through an alternative funding source, there are times when it can pay off to step up your game. With any of the funding strategies below, you'll need to create an airtight business plan, have a step-by-step growth process in place and perfect your elevator pitch. As you pursue these options, you may often hear "no." But remember, you only need to hear "yes" once.

Both incubators and accelerators offer opportunities and funding options for aspiring entrepreneurs. By and large, incubators provide funding for new and disruptive ideas, whereas accelerators provide funding for existing startups and small businesses. Both incubators and accelerators tend to be extremely selective, which means you should have your proverbial ducks in a row before you apply.

Angel investors are people who invest their own money into a startup or business idea with the goal of extracting profit. To find an angel investor, you can reach out to your local network or join an angel investing network like AngelList. "There are also super angels, who are folks that invest heavily in early stage companies," Ehrenberg said.

Private equity is similar to angel investing in that it uses private funds, except that it pools together funds from several investors to spread out risk and increase buying power. Private equity investment firms can be found the same way as other types of big league investors — through networking and online platforms. Before meeting with a private equity firm, perfect your pitch much like those who have shared their business ideas on the popular network show "Shark Tank."

A form of private equity, venture capital is a type of funding provided to new and unproven businesses thought to have high potential. Like angel investors, venture capitalists can be found through networking or through portals like Funding Post. "We've seen a new crop of investors that are micro venture capitalists," Ehrenberg said. "They typically have a fund that is anywhere from 5 to 50 million, and they tend to do quite a bit of investing at the seed level." Once you connect with a venture capitalist, you'll want to make sure your business plan and elevator pitch are pitch-perfect, leaving little room for doubt in your investor's mind. VCs typically require a seat on the company's board.

Banks are generally wary of lending to individuals and new businesses that haven't proven themselves in the marketplace. However, there are loans out there for startups, notably the ones backed by the U.S. Small Business Administration (SBA). Here's what they are and how they work:

Debt financing involves taking on debt to grow your business, while equity financing involves giving investors a stake in your business with the expectation that you'll make them money when your business becomes successful.

"Debt financing is usually preferable because when you do equity financing, you are giving up (some) ownership in the company, and that's almost always more expensive than debt," Ehrenberg said.

Debt financing, however, can be hard to achieve until you have real assets on your balance sheet. "So unless you have revenue, unless you have accounts receivable, or fixed assets that are really worth something, it's really hard to get debt financing," Ehrenberg said.

Equity financing, on the other hand, has its own problems.

"You really need to be going after a large market opportunity, and you need to have the ability to really get a lot of traction in that marketplace," Ehrenberg said. "And — fortunately or unfortunately — equity markets can be very fickle. Something can be really hot today and not so hot tomorrow. Eight years ago clean technology was huge, five years ago social media was huge, today augmented and virtual reality and AI are big. That's one of the drawbacks of equity — what's hot can change very quickly."

• 7(a) Small Business Loans: Read more about the SBA's most popular loan program for startups and small businesses.
• AngelList: This online business portal connects entrepreneurs and small business owners with investors who are looking for profitable business opportunities to invest in.
• Fundable: Fundable is a newer startup aimed at helping entrepreneurs secure the small business funding they need.
• Small Business Grant Programs: Learn whether your small business or startup qualifies for a government grant that could help your business grow.
• Grants.gov: This government portal provides details on a wide range of grants available to small businesses, startups, and existing organizations.
• Grants and Loans for Minorities: The Minority Business Development Agency (MBDA) offers a unique resource on the various grants and loans available to minority business owners and entrepreneurs.
• Loans and Grants: The Small Business Administration (SBA) offers considerable detail on an array of loans and grants available to both small businesses and startups.
• Microventures: As a small business funding source, Microventures has successfully raised over $85 million for successful startups like Facebook.