As a startup founder who needs financing, it is only natural to be initially attracted to venture capital. You may be tempted to follow in the footsteps of the many successful companies that have taken this route.
According to a report published by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), venture capitalists invested more than $48 billion across 4,356 deals last year. That is big money no matter how you look at it.
It seems that every startup in today’s day and age, especially those in the tech sector, are concerned with taking the steps that make them fundable.
But what if you don’t want to go down this path? What if you realize early on that venture capital is not the best option for your startup? This is when you need to consider your other options.
There are Other Avenues
Even if venture capitalists are beating down your door, it’s worth considering other sources of financing. For example, you can retain 100 percent of your company as you are not required to hand over equity in exchange for capital.
Once you have a VC on your side, you are no longer the only person calling the shots. As a founder, you might not love this idea.
If you agree that turning down venture capital is the best strategy, but still find yourself seeking financing, consider one of these ideas:
1. Business Debt Financing
A small business loan is exactly what it sounds like. It provides a company with money, for business expenses, without the exchange for equity.
Just like any type of loan, the borrower is expected to make monthly, weekly, or daily payments over a predetermined period of time.
However, it can be very hard to secure a small business loan if your business has no operating history. Small business loans tend to be a better bet once you have at least 1 year under your belt. Why? Lenders like to have some insight into your business’s ability to produce revenue, control expenses, etc. It’s much harder when there is nothing to reference.
Overall, you’ll find that the longer your business is open, the easier it will be to secure a traditional term loan.
2. Personal Loan
As we said, finding a traditional business loan as a startup is very difficult. So, if you are turned down for a business loan, it may be time to find a lender that offers consumers loans. You can take the money, and apply it right to your business. Consumer loans depend almost entirely on your personal credit score, so your business’s lack of operating history won’t be an issue. That being said, you’re going to need a pretty good credit score to qualify for consumer loan. It’s probably best to pursue this option only if your credit score is 640+.
You also have to realize that you’re putting your personal finances in harm’s way for your business. Make sure you’re okay with this risk, and certain you can pay back the loan.
3. Credit Cards
Using credit cards to finance a startup is not a new concept. This has been an acceptable strategy for many years, albeit with a moderate level of risk.
Getting started is relatively easy, especially if you already have a credit card. In short, you are using your available credit to finance your business. The money can be used for everything from buying equipment to business trips and much more. But, the catch it, you’ve got to be able to pay back what you’re spending, so you don’t get slapped with the high fees most credit cards come with.
The biggest benefit of using credit cards to finance your business is the quick access to funds. Even if you don’t have a credit card, a credit score of good or above will put you in position to secure one within a matter of minutes.
On the downside, credit card abuse can take a toll on your personal finances. If you get in too deep, you may not be able to pay back the debt in a timely manner (if at all). This can cause financial trouble, such as dragging down your credit score, or worse yet, bankruptcy.
Note: if you plan to use a credit card for this reason, think about it as a temporary solution. Furthermore, never lose sight that you have to pay back every dollar you charge, plus interest.
4. 401(k) Loan
Before you took the leap into the startup world, chances are you’ve worked for a traditional company. During this time, there is a good chance you accumulated some money in a retirement account. If so, you have a couple options:
- Take a loan against your retirement account.
- Withdraw the money (and pay any applicable taxes and penalties).
Whether or not you consider this option depends on many factors, including your age, how much money you have saved for retirement, how much you want to borrow or withdrawal, and your future goals.
Note: check with your plan’s administrator for more information.
Venture Capital is not the Only Option
Many people want you to believe that startups should chase after venture capital, but this is not always the best route for every company and founder.
If venture capital does not suit your wants and needs, consider the five options detailed above. One of these may help you secure the funds you need to get your company off the ground.
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