You might have a great idea, a business plan and have already generated interest in your new company. But getting your startup off the ground requires something more to get to the next step: seed money. Seed money, or seed capital, is the funding a startup needs to get off the ground. There is more than one way to get seed money, and each way has its pros and cons.
Personal Financing
One way to get the money together for your startup is by using your personal finances or contacts, without the assistance of outside investors or loans:
- income
- savings
- 401(k)
- credit cards
- family
- friends
While family and friends are also investors, this form of investment is often more casual. It doesn't require the documentation, strict repayment schedule and release of business equity that other seed money sources do.
The benefits to this financing are that it's fairly uncomplicated, and you retain complete control of your business. A big drawback is that you assume all the risks. You're also limited to what you can cobble together on your own – and you want to be careful not to dip too far into your savings.
Seed money may come from a combination of sources.
Loans
Business loans from banks or credit unions have strict repayment schedules and require you to have data and records ready for evaluation. You'll need a business plan, expense sheet, financial projections, an idea of your startup costs and a good credit history. The bank will use these documents to determine whether you qualify and how much they are willing to lend you.
The upside to business loans is that you retain complete control of your business. The downside is that you are not guaranteed to qualify for a loan at all.
The good news is that the U.S. Small Business Association (SBA) backs loans for small businesses and partners with lenders to help you secure a loan.
Investors
Investors aren't exactly lending you money; they're buying a portion of your business with their investment. And this is only if they see promise in your product, service or idea. Venture capitalists are investors who invest other people's funds in a business, while angel investors usually spend their own money to back your startup.
The good thing about working with investors is that it's not a loan, and you may even get mentoring and business advice, depending on the type of investor. The downsides are that investors will expect a percentage of equity in your business and may want an active role in the company. Be prepared to show documentation and sell yourself; investors want proof that they'll see a return on their investments.
Consider also: Pitching to Investors
Crowdfunding
Crowdfunding has grown in popularity among startups, expected to account for over $1 billion in transactions in 2021 in the United States alone. Crowdfunding involves collecting small amounts of money from many individuals in various ways. There are several types of crowdfunding.
- Donations: Investors or contributors do not expect a financial reward.
- Rewards-based crowdfunding: Those who invest receive a reward such as a product, name credit or some other incentive.
- Equity-based crowdfunding: Investors receive part ownership as part of new legislation in the 2016 JOBS Act to encourage the growth of new businesses.
The biggest perk to rewards-based funding is that your risk is minimal. The commitment to investors is generally low. With equity-based funding, you are giving away a part of your business. But a great benefit of any type of crowdsourcing is the potential publicity and exposure. With the right platform and campaign, you can gather investors who are also potential customers and influencers.
Consider also: Can I Use Crowdfunding to Start My Business?
Other Sources of Seed Money
Business incubators and accelerators can involve a mix of business education, business plan preparation, mentorship and access to investors. To encourage and support entrepreneurship, they have sprung up everywhere, from municipalities and cities to ivy league universities and public high schools. Depending on the field you're in, you may even find government grants to help gather seed money.
Seed Money Is Often a Mix
Finding the financial footing for your business doesn't always happen in one stop. Seed money may come from a combination of sources. Fortunately, there are many supportive resources available to help you get started.
Consider also: Advantages & Disadvantages of Private Limited Companies