Recently, I was asked by Meg of Houston, Texas: What are some potential alternative methods to financing a business other than angels and VCs? It’s a question I think most business owners have thought about at least once or twice – if not more. Below are answers from members of the Young Entrepreneur Council, an advocacy group comprised of successful young entrepreneurs, sharing their experience and insights.
Q: What are some potential alternative methods to financing a business other than angels and VCs?
Friends, family and fools
“If your business is truly in its ‘idea stage’ and you are just getting started, you should likely turn to these three sources: friends, family and fools. The SBA does not fund ideas or startups, and for the most part neither, do angels or VCs. If you have a great idea that needs some financing, you are going to need to at least get a prototype built of your product or service before seeking financing from larger institutions like VCs, Angles or Banks.”
“If you sell a product, your vendors could be a great way to finance your business. Work on getting Net 30 terms (you don't pay them for 30 days). Sell first-pay later! Look for SBA programs or local grants and incentives for small businesses in your area. It is usually a good idea to seek outside investors only after you've exhausted all other options.”
-Luke Burgis (@activprayer), founder of ActivPrayer
Bootstrap, bootstrap, bootstrap!
“You can fund your own business on a bootstrap. This way, you can own 100 percent of your company, have full control, and make your own decisions. This approach won't work for every type of business, and it will be harder to hire new employees, unless you're business is growing rapidly. You can also get a loan from a family member, who has money at their disposal.”
-Dan Schawbel (@danschawbel), founder of Millennial Branding
Show investors you’ve got skin in the game
“In our experience, banks are not the right place, nor do many startups have the right combination of factors to justify VC interest. Nothing novel here: we are a big fan of bootstrapping, credit card debt, and friends and family. As an angel investor, I would want to know that the entrepreneur has a significant amount of skin in the game and has executed impressively given very limited prior means before I was to write a check.”
-Michael Mothner (@wpromote), CEO of Wpromote
Create a business around what you have
“Unless you are creating the next rocket ship, there are tons of businesses that you can self-fund and at least get going. I’m not saying funding is bad, but what can you start doing NOW without it? Can you build a community around a topic by blogging or creating your own online show? Can you draw a prototype? How much money do you REALLY need? Can you get by without it? Angels and VCs are great if you want to go really big and don’t mind giving up control. But, the smarter, faster, cheaper method might be to bootstrap yourself to profitability like literally thousands of entrepreneurs are doing every day.”
-David Garland (@therisetothetop), founder of The Rise To The Top
Partner with a financier
“Partner with someone who invests the capital and you invest the labor. Just make sure the partner is one you trust completely – and then some. Depending on the business idea, you may also be able to get a grant or have it be part of a University type incubator project. My personal opinion is that having too much start-up cash can actually hinder a business. When you are strapped for resources, your creativity and product/service really have to measure up to keep up. Best of luck!”
-Shama Kabani (@shama), president of the Marketing Zen Group
Strip down your idea to the bare necessities
“The business itself: A lot of projects that go after financing only do so because they have so many features they need tons of money to build them. Scrap all the features and focus on 1 small core piece. Take a second look at your business plan, odds are many of the things you think you need you really don't to get the first customers in the door. Start getting customers and making money and slowly reinvest it and build the other pieces yourself.”
Don’t just think angels and VCs
“There are many different ways to finance a business. You can use a franchise, where the company who owns the business will set you as the main manager and you can take a profit. You can also apply for small business grants from the government, find sponsors from larger corporations or save your own money. Sometimes, starting a small home-business will gain popularity, where putting the profits back into the business can result in a larger and growing business that essentially funds itself.”
-Nick Friedman, co-founder of College Hunks Hauling Junk
Sell! Sell! Sell!
“Customers are the best way to finance 99 percent of businesses. Customers are often willing to purchase without the product being finished yet. Customers don't require you to pay them back with interest or take a percentage of your company.”
-Michael Simmons, co-founder of The Extreme Entrepreneurship Tour
Raise money from yourself
“If you have a full-time job, save 15-20 percent of your salary and put it away in a savings account, which you can use to fund your business. If you're already working on this full-time, try to get immediate direct revenue from customers – either customers of your business or a few consulting clients.”
-Ramit Sethi (@ramit), author of “I Will Teach You To Be Rich”
Look into credit card financing
“If you’re looking for a smaller amount of money, often you can do balance transfers with credit cards and lock in 10-12 months at an attractive rate. This is not always ideal given that at the end of that grace period the rate will be jacked up. Finally, it is tougher these days but if you’re using the funds to buy real assets you might be able to finance the purchases through a bank.”
-Anderson Schoenrock (@scandigital), co-founder of ScanDigital
Stop trying to raise money
“Many young startups immediately seek funding because it is a method of ‘verifying’ their business or establishing credibility as a viable business. That is not a mature move. The funny thing is attracting a consistent customer base WILL help you get funding later (when you are ready to scale). I am a firm believer that if you have a startup that solves a strong need for a specific group of people, they will pay you to solve that need. That need has a direct value. Charge in advance for it. If no one is interested in paying you to build a solution, perhaps the problem is not as strong as you guessed. Why not go back to your group of potential customers and ask them what they will immediately pay for? You know what makes you a viable business? Customers. Customers with problems they are willing to pay your company to solve.”
-Arielle Patrice Scott (@ariellescott), CEO of Gen Juice
Image credit: yomanimus
The Young Entrepreneur Council was founded by Scott Gerber, a serial entrepreneur, internationally syndicated small business columnist and author of the book, Never Get a “Real” Job. The YEC's mission is to help young people build successful businesses and overcome the devastating epidemics of youth underemployment and unemployment. Ask the Council a question about your business either below or via email to firstname.lastname@example.org.