5 ways to fund a business: How to get your piece of the pie

Published: Monday, Oct. 29 2012 9:34 p.m. MDT

Editor's note: This article written by Alan Hall originally appeared on Forbes.com and is being reprinted with his permission.

No shocker here: One of the biggest challenges for entrepreneurs and small-business owners is finding the funds necessary to launch — and eventually grow — their businesses. If you're reading this, you're likely looking right now.

As a social entrepreneur for more than four decades as well as an angel investor and venture capitalist, I've experienced the highs and lows of business funding myself and have learned the hard way what investors are looking for before committing to fund.

Through the years, I've developed — and subsequently honed — some simple tips to help guide other entrepreneurs through the fundraising process across all phases of the business life cycle. Consider them as a guide while looking to fund your business in the following five ways:

1. Bootstrapping

In the idea/experimental stage, use your own financial resources, such as money from a savings account or careful use of personal credit cards. Wise deployment of these precious dollars is critical.

2. Friends and family

If you don't have your own savings or credit cards — or you do, but your growing business needs additional funding — all is not lost. Consider inviting family and friends to invest in the company with the understanding that their money may not be returned. In most cases, these friends and family are investing in you, not your business. Both parties should think of this investment as a grant with no strings attached. If the enterprise succeeds, a reward for these risk-takers would be a nice gesture.

3. Crowdfunding

Let's take the "friends and family" investment discussion up a notch or two. If you haven't heard about crowdfunding, you must not be serious about funding your business, or you've been living under a rock over the past six months — or both. Crowdfunding (allowed under the JOBS Act launching Jan. 1) allows for a wider pool of small investors with fewer restrictions and is ideal in the early stages of a business, especially if you don't qualify for a bank loan, aren't ready for angel or venture capital funding (as outlined later in this article), or don't have the friends or family willing — or able — to provide the "no-strings-attached grant."

There are many sites that have started crowdfunding already, so if you don't want to wait until next year to start asking for funding for your business or project, you can get started now. Last month, Forbes.com columnist Devin Thorpe highlighted eight online resources for crowdfunding for social entrepreneurs — and that list is definitely not exhaustive (see the comments to his post, which added more than a dozen more). The big names in online crowdfunding — and ones that will benefit from the new JOBS Act and the proposed U.S. Securities and Exchange Commission rules that would enable crowdfunding to start new businesses, not just fund projects — include Fundable and Indiegogo.

Keep your eyes open for more SEC rules on crowdfunding over the next several months.

4. Angel investors

As your business reaches the next level of growth and you see steady revenue on the horizon, begin to approach sophisticated "angel" investors if you need more funding. This affluent individual or a group of individuals who pool their research and resources provide capital for a business startup usually in exchange for convertible debt or ownership equity.

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