Eight Common Funding Sources That Often Come With Disadvantages

When it comes to finding funding for a new business, aspiring entrepreneurs have a wealth of options to select from—from completely bootstrapping the business themselves to bringing on investors who can act as business partners in addition to providing funds, to everything else in between. The trouble doesn’t necessarily lie in the lack of opportunities but instead in weighing the pros and cons of each and choosing the right one for you and your business.

To help provide some clarity, the members of Young Entrepreneur Council discuss some of the more common funding sources for startups, what disadvantages they see in them and what they personally recommend you consider instead. Consider their points of view to help determine the best course of action for your business.

1. Bank Loans

Choosing the wrong type of financing can lead to unfavorable outcomes, such as wasted resources and other negative consequences. When it comes to bank loans for startups, they can be difficult to qualify for. Also, bank loans usually need to be repaid within a set period of time, which can be difficult for a new business. Finally, if you fail to repay a bank loan, it can deteriorate your credit score and make it more difficult to obtain financing in the future. Over the past decade, accelerators and incubators have become increasingly popular. The benefits are that accelerator programs can help startups validate their business idea, develop a business plan and create a minimum viable product. – Maksym Babych, SpdLoad

2. Angel Investors

I’ve seen many startups prefer angel investors to get quick investments for their business, but there’s a significant disadvantage to this funding source. Angel investors often demand a significant equity stake and ownership of your company in exchange for their investment. This can lead to problems down the line when you want to expand your business or sell it altogether. So, you can consider bootstrapping your business instead by using your own finances or business revenue to fund your growth. If you need outside funding eventually, you can explore options like crowdfunding or small business loans. These alternative funding sources will help you grow your business without sacrificing your profits, ownership or control. – Kelly Richardson, Infobrandz

3. Credit Cards

I have seen some entrepreneurs using credit cards to pay for their initial investment in their startup. It is not a good idea because this becomes your personal liability. It takes months and even years to monetize your startup, and credit card loans will become huge in a matter of months. A better option for your startup is angel or seed investment that can come from your friends, family or an angel investor. Also, don’t raise against your equity in the beginning from venture capitalists. Staying conservative and nimble is the key. – Piyush Jain, Simpalm

4. Grants

Grants are a common source of funding for startups, and while they do provide a good amount of non-dilutive funding, they have their downsides. One disadvantage is that the application process can be highly competitive, and many grants have strict eligibility criteria and application requirements. This can make it difficult for some startups to qualify or compete for funding. An alternative funding source is revenue-based financing. This involves receiving funding in exchange for a percentage of your future revenue, rather than giving up equity in your company. This allows you to retain control and ownership of your business while still accessing the capital you need to grow. – Syed Balkhi, WPBeginner

5. Friends And Family

Aspiring entrepreneurs often turn to their friends or family to invest in their idea. However, one of the major disadvantages of generating funds from your loved ones is that it’s difficult to keep things professional with them. This severely affects the relationship not just on a professional level but also on a personal level, as often neither of the parties effectively communicates their expectations. So, in the end, it doesn’t matter whether things turn out to be in favor or against you—the chances of conflict are higher since clear expectations haven’t been set from the get-go. – Stephanie Wells, Formidable Forms

6. Venture Capital

Getting investment from venture capitalists can be a bad idea for startups because it often comes with a high cost, such as giving up a significant portion of equity and control over the company. Also, venture capitalists typically have a short-term focus on rapid growth and high returns, which may not align with the long-term goals and vision of your startup. Instead, consider alternative sources of funding, such as grants, crowdfunding or bootstrapping. It can provide more flexibility and control over your business in the long run. – Solomon Thimothy, OneIMS

7. Crowdfunding

In my opinion, crowdfunding for startups requires a lot of time and energy both while you are raising money and afterward. Just think about how it sounds to have 5,000 shareholders in a privately owned company who want information about it. Instead of doing that, I would recommend entrepreneurs go for angel investors who can help them grow their business with their insights and who have experience with investments in companies that are just starting. This is easier, and a clean capitalization table always helps raise further investment in the future. – Alexandru Stan, Tekpon

8. Government Funding

Getting funding from a governmental agency can be a disadvantage to startups, as they often require lengthy applications and approval processes. You may also have to wait a long time before you get your funding. Even then, there could be conditions and restrictions that limit how you use the money. A common alternative is venture capital funding. You still have to satisfy certain criteria, but the process is typically quicker and you can often get more money. Venture capital firms are also better for scaling businesses and helping them grow faster than if they had to rely on government funding. – Blair Williams, MemberPress