What is startup financing and how can you qualify?

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Startup financing is a big concern for businesses getting off the ground. The right startup funding can see your business hiring the right people, buying the right tools, and securing the right equipment. But, fall short of your funding goals and you may not be able to meet your business needs. Worse still, without proper funding, you could run out of working capital and find yourself in a dire situation.

If you're a new business or still in the planning stages, you need to get startup financing ASAP. Let's take a look at what startup financing is exactly, then we'll examine where you can find it, and how you can make your money last a little longer.

What is startup financing?

Startup financing is money that early-stage companies apply for and then use to launch their product or grow their business. Startup financing can come in numerous forms, with some being non-dilutive financing. This is any type of funding that doesn't require you to exchange ownership equity for the money. For example, an investor will likely require equity in the form of stocks or partial ownership. A loan, on the other hand, is non-dilutive in that it doesn't require you to give over any share of ownership.

There are also dilutive financing options, like the aforementioned investor or venture capitalists (VC). These financing options are still forms of startup financing but require ownership equity in exchange for the money being given.

Whichever funding option you choose, startup financing is incredibly important for any startup business trying to get off the ground. This funding can be essential for buying real estate, trying to enter a period of high growth, or simply turning your business model into a reality. Now, let's take a look at what your financing options are.

6 types of startup financing

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When you're a new company looking for funding, the number of options can be overwhelming. To help you understand your business financing options, we've gathered some of the most popular forms of startup financing. Keep your goals in mind before diving into this list, as each type of financing comes with trade-offs.

1. Small business loan

A small business loan is a loan designed with small businesses in mind. You may have to put up collateral or have a high personal and business credit score in order to secure a loan. But, you’ll also likely have lower interest rates than you would on a personal loan. There are some small business bank loans with slightly more lenient credit history requirements, giving those with a newly established credit score a chance.

If you're in the market for a small business or startup loan, you can start your search by looking at the small business administration (SBA). The SBA is an official government organization that helps small businesses and entrepreneurs get the support they need. While an SBA loan isn't offered by the government organization itself, the SBA will help you find the right loan and help you secure a competitive interest rate.

You can also look at microloans. Unlike a bank loan, a microloan is offered by an individual. This means there's likely no credit score requirement, but the interest rates can vary. The SBA.gov site has a loan finder that can help you find a microloan or more traditional small business loan.

When it comes to the downsides of a loan, there aren't many. You will have an interest rate that applies, but you'll also know what your payments are each month. Loans are, in general, a lower risk form of financing and one of the first places businesses look.

2. Crowdfunding campaign

A crowdfunding campaign is a type of financing in which numerous backers or funders give a company money. In some cases, crowdfunders give money in exchange for an early release of a product or service, like with the platform Kickstarter. 

Other platforms, like Indiegogo, allow companies to set up crowdfunding campaigns with rewards or without. There's also equity crowdfunding, which allows businesses to raise money via backers — users on the crowdfunding platform — in exchange for equity, or partial ownership of their company.

To pursue crowdfunding, research the growing number of crowdfunding platforms. Kickstarter and Indiegogo are both good places to start, but more platforms are always on the horizon. Each platform will offer their own unique perks. Keep in mind that the bigger platforms may take a larger cut of the funds you raise, but they will also have a larger audience.

When it comes to funding options, crowdfunding is low risk. A failed campaign can cost you time and a small amount of money. The worst case scenario is actually if you have a successful funding campaign but fail to deliver the promised product or service. This can cause irreparable damage to your brand, which can set you back more than money.

3. Small business grants

Small business grants are like loans in that you can receive a lump sum of cash for your business needs. But unlike a business loan, a business grant doesn't need to be repaid. This fact means there's no interest, no credit requirement, and no risk. But, it means grants are highly competitive.

Landing a small business grant takes a lot of effort, as you'll have to apply for many. But, the reward can be great, and again, with no risk on your part other than lost time. To start your search, check the SBA grants page.

4. Venture capital firms

A VC firm invests in promising business, giving them the funding they need to grow and reach a wider market. Unlike the previously mentioned startup financing options, a VC typically requires equity in your company in exchange for the money given. This means your company will either need to give the VC some equity, or the VC will expect some kind of payout or return on investment (ROI) in the future.

If you're comfortable owing part of your profits to someone else or having to run decisions by an outside group, a VC firm can provide substantial funding in a time of need. To find this kind of financing, research VC firms that invest in your industry. From there, make sure you have a business plan and a minimum viable product before reaching out.

5. Investors

Investors come in many varieties, from angel investors to friends and family. In either case, an investor is someone who gives your business money specifically for business use.

In the case of an angel investor, the investor will give you money and often expect some kind of equity-based payout or partial ownership. Friends and family investors are exactly what they sound like: friends and family that give your business money. The terms and conditions will vary depending on your friends and family, but you should generally offer to pay them back with interest or to provide an ownership stake.

To find an angel investor, be sure you have a business plan and pitch deck ready. This will help your business look professional and show the investor you're serious about what you're doing. Then, research angel investors in your industry and start pitching.

6. Line of credit

A line of credit, such as a business credit card, is a type of financing that you can use for a number of purposes. A line of credit will come with an interest rate that varies depending on your credit score. Once you acquire a line of credit, you'll pay interest on any unpaid balance from a specific payment period — similar to how you pay interest on any unpaid part of your credit card balance. 

Also similar to your average credit card, the payment period for a line of credit is typically 30 days, but it can vary. For example, if you make a $1,000 charge to your line of credit, you’ll owe interest on any of that $1,000 not paid off by the end of the 30 day period. 

A line of credit can be especially useful if you push for longer payment terms. With long payment terms you can have 60 or more days to pay off a balance before accruing any interest. This allows you to maintain a healthier cash flow.

To open a line of credit, do comparison shopping and find a financial institution that offers a credit card with the perks you're looking for. 

Making your money last

Once you have your startup financing, the last thing you want is to let it fizzle out. Smart money management is the key to making your startup funding last, and a cash management account can help you do just that.

Although a cash management account isn't a bank account, it does provide the functionality of a savings, checking, and money market account in one. This makes it possible to get a business credit card, write checks, receive wire transfers, set money aside in savings, and even grow your funds through a high-yield account. 

A cash management account streamlines and simplifies the entire money management process, which allows you to stay abreast of your account balance and ensure your money is being used properly.

If you want to start a cash management account and help your money go farther, a Brex Cash account opens the door to a great business credit card, a high-yield account, and excellent customer service — all in one place.

Financing your startup

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Startup financing is an integral part of the startup process. Think about what your business needs are and what kind of tradeoffs you're comfortable with. Then, go through the above options and determine which route is best for you and your startup. 

It's likely you'll end up utilizing several forms of startup financing, as your business needs can and will fluctuate over time. Anytime you seek new financing, carefully consider your options and keep your eye on the prize: developing your startup into a profitable business.

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