Access to proper funding is ultimately what makes or breaks startup businesses. You may have perfected an exciting new business idea, but that idea isn’t going to go anywhere without the proper funding in place. Fortunately, there are more ways for aspiring Texas entrepreneurs to raise money today than ever before.
It can be difficult to decide which funding options to pursue, but understanding the pros and cons of each option is fairly simple. It’s important to analyze every angle of your business along with your future goals to determine which funding opportunities best align with your new business venture. One wrong financing move and you could end up right back at square one. Below are the seven best options for funding a startup in Texas.
1) Small Business Loan
Typically the first place entrepreneurs go when considering funding is the bank. Small business loans are one of the least expensive sources of funding with interest rates currently hovering at 5 to 8%. Small business loans are also typically long term, extending an average of 10 years so that business owners can enjoy lower monthly payments. You can use the National Information Center’s Institution Search Tool to find a list of nearby Texas banks.
The downside to small business loans is that it’s hard to qualify for them. In most cases you need a credit score over 700, a breakdown of how you plan to spend every penny, and some collateral to receive a loan. If you aren’t able to qualify with commercial lenders, there are a few non-profit lenders in Texas that may still be able to grant you a loan. LiftFund, BCL of Texas, PeopleFund, and BiGAUSTIN all work to provide aspiring entrepreneurs with funding opportunities.
2) Angel Investor
Angel investors are sole individuals who provide capital to business startups in exchange for convertible debt or ownership equity. Angel investors offer great opportunities for small business owners as they provide funding and mentorship while still allowing owners to maintain control of their companies. Angel investors are one of the most popular financing options for entrepreneurs seeking funding. The best places to find angel investors are either at a Texas small business development center, or on Gust.
While working with an angel investor is an attractive financing option, they will often want a large stake of the company in return. It’s not unheard of for an angel investor to ask for up to 49% ownership of the company. It’s ultimately up to you to decide whether or not you’re willing to fork over such a large portion of ownership.
3) Venture Capitalist
Venture capitalists are like angel investors on a much larger scale. Venture capitalists are professional groups that frequently fund startups. As you can probably imagine, these groups have a lot of money available to offer startups and plenty of resources to help businesses succeed.
With an exponentially growing entrepreneurial ecosystem, there are several venture capitalist groups startups can reach out to in Texas. Texas venture capitalists include Murphree Venture Partners, Mercury Fund, Aristos Ventures, Trailblazer Capital, LiveOak Venture Partners, Advantage Capital Partners, and Austin Ventures.
For many entrepreneurs, striking a deal with a venture capitalist would be the ideal situation. However, here are a few downsides to this method of funding. Venture capitalist tend to seek larger opportunities that are both stable and scalable. If you don’t currently have a strong team with a few years of operation under your belt then this may not be a feasible route to pursue. Like angel investors, venture capitalists also require a sizable stake in the company. If you’re not ready to give up a bit of control in your company then this isn’t the option for you.
4) Crowdfunding
Crowdfunding is one of the latest ways companies are gathering business funding. Crowdfunding sites like Kickstarter and Indiegogo allow you to pool small investments from contributors around the world which collectively adds up to match, or in some cases, exceed the amount of funding you could acquire from any other source.
Entrepreneurs can create an account on a crowdfunding site and put up a description of the business they hope to start or grow along with their desired level of funding. Anyone in the world can then contribute either for a small reward or a pre-purchase of your product or service.
While anyone can start a crowdfunding page, not everyone will earn funding. In fact, an average of 69 to 89% of crowdfunding campaigns fail to reach their fundraising goal. Crowdfunding is extremely competitive and it requires some marketing expertise. The most successful campaigns are backed by a good story and a lot of social shares. If you don’t have the time to put into promoting your crowdfunding page, then crowdfunding probably isn’t the best option.
Before you start a crowdfunding campaign, make sure about how much you really need. You don’t want to set a goal that in the end doesn’t cover all your expenses.
5) Credit Card
If you have impeccable credit history, you may actually be able to use a line of credit to fund your startup. Banks have cards designed specifically for entrepreneurs like Capital One’s Spark Cash for businesses or Bank of America’s Cash Rewards for Business MasterCard.
This is by far the riskiest method of achieving funding. If you can’t make your payments both your business and credit score will tank. However, if you can make it work you’ll earn your funding while still maintaining full ownership of your company.
6) Family & Friends
In starting up your business you may consider asking those who’ve supported you your whole life to support you in your new business venture. Borrowing from family and friends means not having to worry about strict payment deadlines. You’re still subject to interest charges due to IRS laws, even if you’re borrowing money from a parent. But you may want to think twice before asking family and friends for money.
If you aren’t able to repay the money you borrow you may end up severing a few ties with certain friends and family members. It’s an aspect you should certainly consider when deciding whether or not to ask for help from family and friends.
7) Self-Funding
Last but not least, you could always fund your new business yourself. The costs to start a business are lower now than they’ve ever been. Approximately 57% of startups are now self-funded. It will probably take you significantly longer to save up the amount of money you need, but you won’t give up any equity or control and you won’t have to pay any interest.
Starting your own business?
At the end of the day every funding decision is a complex tradeoff between short-term and long-term costs and paybacks. It’s ultimately up to you to weigh your options and decide what makes sense for your business. With so many funding options at your disposal there’s no excuse holding you back from starting up the business of your dreams.