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Guide to Startup Financing: Small Business Financing Options

September 07, 2022
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If you’re starting a business, one of the most important early decisions you will need to make is how to get your funding. That critical startup financing, and where you get that capital, will affect how you structure and operate your new company. There are many options, and each business will be unique in which type of financing makes the most sense.1

In this guide to small business financing, we discuss the different types of financing and the financial journey of a new business venture, from seed funding for startups to small business loans and investors to take your company to the next level. Yeshiva University’s Sy Syms School of Business online MBA program gives you the financial skills and savvy you need to succeed.

How to Obtain Startup Financing

The first step in obtaining startup financing is to have a solid business plan. Before you think about how you’re going to raise capital for your new venture, you must understand what your financial needs are to build your business. Your startup costs may include everything from office space, equipment and employee salaries to licenses, insurance, legal and accounting fees, advertising and marketing. These costs will depend on what type of business you have and how you plan on running it.2

Knowing your startup costs will help you to estimate your profits, do a break-even analysis, attract investors, secure loans and save money with any available tax deductions.2

Small Business Financing Options

There are various ways to generate money for a small business, and each one has its advantages and disadvantages. Once you have a better understanding of your business, requirements and goals, you’ll have a better idea of which methods are the best fit.

Self-Funding (a.k.a. Bootstrapping)

With self-funding, you use your own resources to finance your startup. This may include pulling money out of your 401(k) or savings account or using a personal credit line. The advantage is that you retain control over your company, but the disadvantage is that you assume all the risk. If you use your retirement savings, you may face penalties or not be able to retire when you want to. For a line of credit, you’ll need a steady income and will be required to make minimum payments with interest. Before you make a decision, it’s a good idea to speak with a financial advisor.1,3

Family and Friends

You may be able to get financing from family members or friends and secure a loan with lower interest rates than you would from a bank. Less debt means more money for your business, but owing money to friends or family can put a strain on relationships.3

Investors (Venture Capital)

Investors can help you fund your business by making a venture capital investment. Usually, this type of financing is given in exchange for an active role and ownership share in the company. Investors look for high-growth companies and they assume a higher risk in return for potentially greater returns. There is typically a longer investment horizon (length of time that the portfolio is held by the investor), and these investors will likely expect to be on the new company’s board of directors.1, 4

You may find an individual investor, also known as an angel investor, or a venture capital firm. Make sure that they are experienced and reputable. Share your business plan and comply with their due diligence.1 Among other things, angel investors are interested in the passion and commitment of the founders, the market opportunity that you’re addressing, the company’s potential, a well-thought-out business plan and valuable intellectual property or technology.5 Once you have negotiated and agreed to terms, they will make the investment—usually in installments as your company achieves certain milestones.1,3

Crowdfunding Campaign

With crowdfunding, you raise funds through multiple people, in exchange for rewards such as products or services. A crowdfunding campaign gives you the chance to promote your company and it helps to have a compelling story with attractive rewards. The advantage is that in most cases, you’re not giving away a share of ownership or a financial return. Since it isn’t a loan, there are no payments to be made. The more popular crowdfunding sites include Kickstarter, GoFundMe and Indiegogo.1,5

SeedInvest is an equity crowdfunding site on which you can sell interest in your company or stock for cash. For this type of crowdfunding, you must comply with state and federal securities laws.5

Small Business Loans

If you’re a founder who wants to be in complete control of your company, a small business loan is a smart choice. You must have a business plan, expense report and financial projections for the next five years. This tells you how much financing you need and it helps banks determine if your business idea is sound. Research banks and credit unions to find the best loan terms.1

If your company is unable to secure a traditional business loan, consider SBA-guaranteed loans. The U.S. Small Business Administration (SBA) agrees to guarantee a business loan, in situations where the bank considers the company too great a risk. 1

SBA Investment Programs

The SBA also offers investment programs for small businesses. These include:

  • Small Business Investment Company (SBIC)
  • Small Business Innovation Research (SBIR) program
  • Small Business Technology Transfer (STTR) program1

Your company will need to qualify to take advantage of these programs.1 SBA investment programs are just one example of equity funding. Other equity funding options include an initial public offering (IPO), angel investors, venture capital, equity crowdfunding, mezzanine financing and royalty financing.

Mezzanine financing uses both debt and equity and is most common among companies that are at an intermediate stage of growth. Royalty financing is revenue-based, where the equity investment is in a product’s future sales.6

Other Funding Options

Other funding opportunities for small businesses include joining a startup incubator, qualifying for government grants and subsidies, and applying for a microlending program, where the loans come from individuals rather than banks. There is also peer-to-peer lending, with online platforms that match borrowers with investors.3

The Sy Syms School of Business online MBA program includes electives for founders that delve into these different types of funding options so that you can make strategic decisions for your startup.

What is Seed Funding for Startups?

Equity funding occurs in stages, called rounds, and seed funding is the first funding round. It is the initial money that a new venture raises. Startups use seed funding to finance product development and market research, so they can develop their first products and find their target audience. Seed funding is also known as angel investor funding.7

There can also be pre-seed funding, which occurs at the very start of the new enterprise, most often by the founders, and their family and friends. 7

Various types of investors may take part in seed funding, including the founders, angel investors, venture capital companies and incubators. Seed funding can usually raise between $10,000 and $2 million for the new business. A startup’s valuation at this point is around $3 million to $6 million.7

This may be all that is needed to get the startup going. If not, the founders can move on to further funding rounds. Once the company establishes itself with a user base and consistent revenue or a key performance indicator, it may wish to raise more capital for further growth. 7

What is Series Funding and How Does it Work?

Series funding is the initial venture capital financing for a new startup. It progresses from the seed stage to Series A funding, then Series B funding, Series C funding and so forth. These series work similarly, in that investors provide cash to the founders, and in return, receive an equity stake in the company.7

Series A Funding

At the Series A stage, it is vital to develop a business model that will make your company profitable over the long term. Investors want to see a strong strategy and a profitable business, in addition to smart ideas and enthusiasm. Series A round investors tend to be venture capital firms, and it’s often one key investor that brings in others. This round of financing will usually raise $2 million to $15 million, and the company’s valuation at this time may be as high as $24 million. 7

Series B Funding

This round of financing takes the company past its development stage, to expand its market reach. Investors want to see a steady customer base and that the company is ready for greater success. Series B funding helps the business to meet increased demand for its products or services. This likely includes talent acquisition, business development, technical support, advertising and sales. Series B-funded companies are valued between $30 million to $60 million. 7

Series C Funding

At this stage, the company is very successful. Additional investment may help them to develop new products, expand markets or maybe even acquire another business for a strategic purpose. The focus is on further growth, with greater returns for investors. Investment banks, hedge funds and private equity firms may join at the Series C phase.7

Once a company finishes with Series C and has boosted its valuation, it may be ready for an initial public offering (IPO). However, companies can continue into Series D and Series E funding rounds, if needed, to achieve their goals. 7

Sy Syms online MBA students gain deep knowledge about startup financing in a flexible program that’s designed for financial professionals.

Master Startup Financing

The Yeshiva University Sy Syms School of Business online MBA program helps you advance your career with expert instruction from business leaders and hands-on opportunities. This online MBA degree will help you to stand out in today’s highly competitive business environment so you can forge your own path.

Included in the multidisciplinary curriculum are courses specifically designed for startup founders, including financial reporting, entrepreneurship and startup finance, where you will take a deep dive into seed funding for startups and the different kinds of startup financing mentioned in this article.

Talk to an Admission Advisor today to join a powerful community of entrepreneurs and innovators at Yeshiva University’s Sy Syms School of Business.