We’re tired of reading terrible advice about the best startup funding options. It’s no wonder startup entrepreneurs are confused!
- An SBA blogger lists credit cards as #1 of 3 “popular” options. (popular doesn’t make it best!)
- This post advises startups to seek a bank loan or credit card as #1 “most reliable.” (startups getting bank loans reliably? really??)
- Here, “borrow from your 401(k) retirement” is #1. (20-somethings, how’s your retirement fund doing?)
- Digital lenders take you directly to their startup loan products. (yeah, just trust us, we’re the best)
Like so many of you who have thought “I can do better than that!” we’ve taken action. Here is our ranked list of the 16 best startup funding options for 2018. Note that our ranking is general for the 500,000+ companies that will start next year in the US. What’s best for your startup may be different.
We are focusing on cash funding that you need to get up and running, in many cases just for the first 6 months or so of the business.
Which Color of Money Is Best For Startup Funding?
In general you should prioritize your search across the four colors of startup money for entrepreneurs as follows:
- Bootstrapping is #1, Plan A, always a long list of options to decrease needed startup cash (“a penny saved is a penny earned”) or find it in creative places
- Grants are #2, often hard to get but if you are a fit they are low cost cash
- Debt is #3 and often unavailable to companies just starting out, yet there are important options in some cases
- Equity is always #4 because in the very early days you are selling cheap – but in some cases it’s a vital part of the mix.
It’s worth saying that startup funding is frequently “all of the above.” Startups often patch together a a bit of this and a bit of that in their effort to make something out of nothing. That’s true of startup funding as well.
Best Bootstrap Startup Funding Options
- Customer revenue is by far the best way to fund your startup in 2018, or in any other year. Some serial entrepreneurs won’t launch a new venture until they have customers ready and willing to pay. It’s not always an option early on, but the earlier you can get it the better.
- Personal savings is underappreciated in American culture, but saving to start a business is a great way to go. Retail success story Forever 21 was started by a Korean immigrant couple with just $11,000 in savings.
- Inheritance, severance checks, or other windfalls are hard to plan for but sometimes even a modest unplanned positive financial surprise is enough to launch. MailChimp started that way.
- Borrowing from your 401(k) is actually a great program – called ROBS or RollOvers as Business Startups – but only if you aren’t blowing all your retirement savings (50% of all startups fail by year 5, so keep that in mind).
- Home Equity Loan or Line of Credit can be attractive because it is relatively low cost debt. However that 50% failure rate is important to remember along with the risk of home prices going down in your local market. This personal loan is an investment of your personal assets into the business – in this case, your personal home equity – which is why we think of it as bootstrapping.
- Rewards based crowdfunding such as Kickstarter or Indiegogo can be an option for consumer product startups. But you typically need some other funding approach to get your product or service 90% complete before you can successfully raise what is typically $10,000 from early customers. And, crowdfunding campaigns require excellent marketing plans and execution to be successful, which in turn can require upfront cash!
Best Grant Startup Funding Options
- Business Plan Competitions can provide the winners with no strings attached seed funding. There are many local competitions so check your area as well as our list of National/ International/ State competitions for all startups, and our list of College Business Plan Competitions.
- State Technology Grants are available for some types of companies. Check out the members of this organization to find your appropriate state funding entity.
- Equity-free Accelerators provide cash grants, not equity, along with their business assistance. This resource has a list worth investigating if you have an innovative startup and you’re willing to travel.
- SBIRs or Small Business Innovation Research federal grants take a long time, a lot of work to apply for and are competitive, but if you need a long runway for technical product development they are a strong choice.
Best Startup Loan Options
- Microloans from CDFIs are a very specific, federally subsidized program to provide small loans (under $50,000 but averaging about $13,000) to disadvantaged populations through non-profit Community Development Finance Organizations. You get business counseling before and after the money. We have a big list of potential providers.
- Friends and Family Loans are common, but should not be your first funding choice because of the “Thanksgiving Rule.” If you lose their money, Thanksgiving family gatherings can be tough for the rest of your life.
- SBA Loans are the gold standard for small business debt. According to SBA statistics about 1/3 of the funding goes to “new business.” If your “startup” is actually a business you are acquiring they are a good option. But most bank lenders giving out large SBA guaranteed loans won’t consider young businesses, since the failure rate is so high in the early years.
Best Equity Startup Funding Options
- Accelerators are widely available for very early stage startups that have innovative product or service ideas. See our list of accelerator lists for more details. It’s useful to know that some companies hop from one accelerator to another as a way to keep the funding coming, but there is a high dilution price to pay for that strategy.
- Friends and Family Equity is likely to be less expensive than angel investor funding. But there are lots of complications to consider, including the failure possibility and Thanksgiving fallout; relatives who bring constant bad advice along with their checks; and awkwardness if later, professional investors think the friends and family paid too much for your stock.
- Local individual angel investors can be a great option, especially if they are experienced, exited entrepreneurs who offer mentorship along with cash. Angel investment groups can be great follow-on investors after you have made some progress, but they rarely invest at the idea stage.
Other Startup Funding Options
The list above is by no means exhaustive.
Some options we don’t include because they are almost never available to startups. Venture capital is one of those – it usually takes 1-3 years (if ever) to be ready. Trade credit is helpful once you are up and running but typically you need time to build a track record.
Other options are dangerously expensive. Personal credit cards are commonly used for business startups but they are dangerous because of their high interest rates, high fees for late payments, and the temptation to slide into a debt spiral from which you can’t return.
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