Why Traditional Funding Might Not Be Right for Your Startup

Angel investors and bank loans are far from your only options.

Financing is the lifeblood of any startup company. No matter how good your company’s product or service is, without money to develop, produce and market it, your idea is likely to remain just that. The good news is there’s no shortage of small business loan options. While true Small Business Administration Loans can be challenging for new businesses to obtain, for certain companies, financing can be a snap. From venture capital to bank loans to SBA loans, lenders are eager to invest in growing companies. The question is, are these types of traditional funding right for your company?

You Might Be Giving Up Control of Your Company

Venture capital, commonly referred to as VC funding, is often associated with Silicon Valley “unicorns” and multi-billion-dollar IPOs, but other startups can get this type of funding, too. However, any VC money that comes into your company isn’t a charitable donation. In exchange for this type of funding, you’ll have to give the investors shares of your company, providing them with some degree of ownership. You may not have to give away a majority interest, but if you sell 10 percent of your shares, that means that 10 percent of all profits your company generates will go into the bank accounts of investors.

From there, things can often change even more. Most companies that raise VC funding do so more often than once, giving away additional shares in the company every time. At some point, these investors may have a large enough stake that they will have a major influence on how you run your business. The bottom line is that if you start taking VC financing, you must be prepared to part with both future profits and future control. If you’re ok with this dynamic, VCs can be a great option, but it’s not for everyone.

You Might Lose Your Time to New Tasks

Most investors aren’t likely to fork over money to your startup unless you can sell them on the idea that they’re going to earn a handsome return on their investment. If you don’t like sales or aren’t good at it, you’re going to have to spend time and effort to learn how to do it properly if you want to raise funding.

The problem with this is that even the most successful entrepreneurs have a singular focus, completely dedicated to the vision of their company. If you’re going to have to spend half your time networking and trying to market your company to potential investors, you’ll have that much less time to dedicate to your company’s vision.

Read: Lessons You’ll Learn When Looking for Startup Funding

You Might Be Overwhelmed by Restrictions or Regulations

Many first-time business owners have heard of SBA loans, and they can be a good option for growing businesses. However, many entrepreneurs don’t realize that the SBA will typically ask for three years of financial records from your business, which is impossible for new businesses. If you’re a startup, you’ll need to provide extensive financial projections, collateral and other documentation to support your loan. The reason is that the SBA doesn’t actually issue its own loans; rather, it provides a government guarantee on loans issued by banks.

With traditional bank loans, even more rigorous regulations can come into play, as banks don’t receive the benefit of the SBA guarantee if you work with them directly. Many of the big-name banks you’re familiar with will ask for three years of business tax returns and will expect to see profits and growing cash flow. Again, for many new businesses, this is a non-starter.

How can you get startup financing if banks and the SBA won’t loan you money? The good news is there are options, like Seek Business Capital, that focus on helping finance the underserved market of startups. With just a few clicks, you can even get preapproved for funding and start exploring your options the same day.

You Might Not Get the Help You Need

When you raise money from certain sources, such as venture capital or even the SBA, you may feel as if you’re going to get some knowledge and help along with your financing that can take your company to the next level. In the case of the SBA, yes, you should be able to take advantage of that organization’s excellent educational information. However, the SBA isn’t going to help you run your day-to-day operations. On the other side of the coin, a VC may be very interested in telling you how to run your business — in a manner that could conflict with your own. This can be an impediment to running your business as you envisioned, and may not be worth the benefit of receiving the funding in the first place. On the other hand, if you’re open to feedback from investors, VCs can be a great alternative to loans.

Related: How to Leverage The Right Kind of Financing Today to Grow Your Business Tomorrow

The Bottom Line

Traditional financing sources might not always be the best option for newer companies. In fact, when it comes to lending sources like big-name banks, you’ll likely find that the financing options for your startup are limited. If you choose to go the venture capital/private investor route, you may be asked to sign over a significant chunk of your business. As a startup, you might consider looking for an alternative lender, like Seek Business Capital, that understands how to work with newer companies but won’t take a chunk of your equity. In the end, it all depends on what you’re comfortable with.

Read This: 5 Questions to Ask Yourself Before Starting a Business

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2 thoughts on “Why Traditional Funding Might Not Be Right for Your Startup

  1. I’m needing a small loan to make my small company public I need a better truck and a trailor and funds for equipment storage . I paint house and Lawncare so I’m triing to keep my buisness year round .i can get a good used truck and trailor that don t bother me . I can get my EIN numbers this week . I got 5 clients lined up for spring . I can get clients I just need what it takes to lock them down .i want to look and feel professional.. Even if the loan covers the vehicle and trailor . and insurance then at least your taking a chance on me .its my dream . I have no credit right now I have no hope . thanks for your time. Gordon . Radford

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