By Ed McLaughlin and Wyn Lydecker – Originally posted on LinkedIn

You are burning to start your own business, but the biggest obstacle you face is funding your startup. Where in the world are you going to get the money? While small business loans may be available, they usually require personal collateral and a mountain of paperwork. You can ask your friends and family, but do you really want to put your closest relationships on the line? If you read my most recent blog: “Funding Your Startup – Bootstrapping Is Best!” you can understand why I advocate self-funding. Even though you shoulder the risk, you set the strategy, you make the decisions, and you maintain control. Yet, deciding to bootstrap is a big step. If you do not have the personal resources to invest or the stomach to take the risk, you need to consider other alternatives:

Equity Investors – Angels and VCs

Professional equity investors, such as angels and venture capitalists, provide funding to entrepreneurs in exchange for an ownership stake in the new business venture. They are sophisticated investors with access to capital, industry expertise, and substantial relationship networks that can enable a business to flourish. At the same time, their goal is to maximize their returns on their investments by getting as large an ownership share as possible in exchange for their funding.

Vendor Financing

A reasonable way to fund a startup is with vendor financing, as long as the interest rates are competitive with other forms of loans. For example, Infinity Fitness, a personal training business I’ve invested in, got financing for their exercise equipment from the manufacturer, enabling Infinity to lift off. Likewise, tech startups can often strike a deal with designers or coders to take payment in equity rather than cash. The vendor, in that case, becomes a part owner of the company with a vested interest in its success.

Economic Development Funds

Economic development funds are run by states and municipalities, and they make loans and occasional grants to people with low incomes or to businesses in special economic development zones. When dealing with economic development funds, you will probably need to make a case that your business will create jobs and contribute to the local economy. You will also have to present financial statements and a business plan. Most economic development departments offer technical assistance to small business owners who wish to take advantage of their programs.

Microloans

Microloans are loans of $25,000 to $50,000 that are usually available to businesses that don’t qualify for traditional loans. The entrepreneurs that receive these loans are usually in a low-income bracket. The SBA provides the funds to local nonprofit intermediaries, who in turn, lend the money with their own repayment terms. Some funds aim to help minority- or women-owned businesses. Typically, the funds can be used for working capital, raw materials, furniture, repairs, equipment, or machinery.

Crowdfunding

Crowdfunding is an internet-based capital-raising vehicle created to enable anyone to seek financing for projects and new ventures. Unlike raising money from angels and venture capitalists, the amount of capital that can be raised is limited to the size of the consumer’s wallet and the number of consumers interested in the venture. In addition, crowdfunding enables you to keep control of your business, as you don’t need to sell equity in order to raise capital. To crowdfund successfully you need to become familiar with the rules of the crowdfunding sites, understand what makes for successful crowdfunding campaigns, and be ready to deliver on the promises you make to the people who donate to your startup.

Equity Crowdfunding

The JOBS Act has enabled companies to use equity crowdfunding to raise capital. Experts are debating the pros and cons of equity crowdfunding for both the investors and for entrepreneurs. The SEC regulations are very complex. If you are thinking of going this route, you should speak with an attorney who is well versed in this new type of funding and become familiar with the details of the JOBS Act and the associated SEC regulations.

Convertible Debt

An increasingly popular funding mechanism for startups is the convertible bond or note, which essentially starts out as a short-term loan at the seed stage. The security is convertible into equity (usually in the form of preferred stock) at the investor’s option when the security matures, and is convertible into equity at the company’s option when the entrepreneur closes the next round of financing. Anyone seeking to structure a convertible debt deal at the seed stage needs to hire a qualified attorney steeped in venture funding and convertible debt experience.

The Decision

If one of these options fits your funding needs, take the time to learn more about it. Investigate the pros and cons and seek out professional advice from an attorney, accountant, or other professional small business counselor. Then after assessing all these options, don’t be bashful about reconsidering bootstrapping. What options do you believe are best for startup funding? Let us know in the comments. Ed McLaughlin is currently co-writing the book “The Purpose Is Profit: Secrets of a Successful Entrepreneur from Startup to Exit” with Wyn Lydecker and Paul McLaughlin. Copyright © 2014 by Ed McLaughlin All rights reserved.