How do startup founders get the capital they need to get off the ground? There are as many techniques as there are entrepreneurs, but several tactics seem more effective than others. Many first-time owners borrow a strategy from the publishing industry and pre-sell goods and services to bootstrap a startup. Others invest in real estate and rely on monthly rental income to support their businesses.
Direct equity sales and crowdfunding are other approaches that can be effective for certain companies and entrepreneurs. Perhaps the most common way founders raise money is through informal networks composed of family members, friends, and coworkers. Angel networks can be an ideal place to look for seed funds, and funding a startup on credit cards should always be a last resort option for a certain percentage of new owners. Use the following details to begin your search for the capital you need to launch a startup.
Presale of Goods and Services
For generations, authors have bootstrapped their publishing efforts by selling copies of a book before it is completed. These advanced sales can be an ideal way to raise money for any business, particularly startups. Pre-selling works well in niches where customers are willing to pay advance for a product or service that is not yet on the market.
Income from Rental Properties
For founders of new small businesses, investing in rental real estate can solve several problems. The main benefit of property ownership is the creation of a passive stream of regular income. That’s a massive plus for a cash-strapped entrepreneur. Also, the property can appreciate significantly over time and thus offer owners the chance to reap long-term profits. Of course, the apparent downside includes two kinds of taxes: capital gains and property. They can both have an impact on the total profitability of an investment. The best way to determine how to minimize taxes on these kinds of assets is to review a comprehensive guide on how capital gains taxes are calculated during a property sale.
In the digital age, amid all the small business financing options, countless business owners have turned to crowdfund platforms to raise the cash they need to open the doors of a new company. Several online providers let entrepreneurs connect with people willing to fork over a fixed amount of money in exchange for a stake in the business or a credit on future purchases. Crowdfunding platforms sometimes serve as pre-sellers of goods and services. But most service providers offer a percentage of ownership, similar to shares of stock, in exchange for seed money. Beware of platforms that charge excessive fees for signing up or offer pricey memberships. The best providers in this niche charge nothing at all or meager costs.
Family, Friends, and Credit Cards
The most common way for entrepreneurs to raise cash is through an informal network of family, friends, and acquaintances. Alongside this time-tested but not always reliable tactic is using credit cards. Both approaches are hit-and-miss, but they have the advantage of helping founders gather at least a small amount of funds. Be sure to write formal financial agreements with anyone who lends or gives you capital. That way, there will be fewer misunderstandings later on. Credit cards should be viewed as a last resort because they tend to come with a high cost in the form of interest. If you must use plastic to launch your organization, keep detailed records for tax purposes. When it’s time to file, you can pull the business expenses off card statements and use them to create a proper profit-and-loss document. Check with your bank and see if they’ll issue a small balance card in the company’s name, with you as cosigner if necessary. Doing so is an effective way to build up a credit history for your organization. Later, you’ll be much more apt to be approved for small business loans if the entity has a verifiable credit identity and good rating.