- The COVID pandemic posed systemic and sector-specific challenges for the funding strategies of startups and other types of small businesses in the US economy in 2020.
- Finance trends for startups in 2021 include greater availability of government funding, and a post-2020 rebound in venture capital investments.
- The emergence of novel and innovative funding models like crowdfunding have expanded the range of funding possibilities for startups.
Startup companies play a vital role in driving economic innovation and growth. However, many small, newly-formed firms were negatively affected by the COVID pandemic in 2020, compelling the US Small Business Administration to establish a loan program specifically to address this crisis.
Despite government support such as the SBA’s loan program, small startup companies face many systemic challenges in the Post-COVID economy, including securing viable and commercially advantageous funding.
Monitoring trends in startup financing is thus one of the most important actions that new small companies can take in order to survive and thrive amongst the competition in 2021. The need to keep abreast of finance trends is especially important for entrepreneurs who are creating businesses in industries hardest hit by the COVID pandemic, such as tourism and hospitality. However, even in industries that have remained more robust during this period, such as online retail and insurance, it is vital for entrepreneurs to consistently monitor patterns in business financing in order to have the most optimum funding strategy for their startup (for more information about how to become an insurance agent, see this resource).
Banks loans and credit
Banks loans, lines of credit, and credit cards remain one of the primary sources of funding for new businesses. In the case of bank loans, this traditional type of funding is still utilised by small businesses for multiple reasons, including the fact that business owners or entrepreneurs retain full ownership of their business, as well as the fact that interest on bank loans can be deducted from the business owner’s tax income.
It is important for entrepreneurs to note that in response to the economic consequences of the COVID pandemic, the federal government has instituted a range of measures that require banks to be more flexible and accommodating of business owners’ financial needs and challenges during this period.
Government – Small Business Administration
The government has begun to play a more significant role in providing funding support to small businesses and startups. The Small Business Administration (SBA) provides a wide variety of funding and investment programs focused on new, small companies, including direct loans and SBA-guaranteed loans. As mentioned earlier, the SBA also created a COVID-related funding programme in 2020 that offers small businesses loans and grants.
Investors – venture capital firms
Investment from venture capital (VC) firms remains the dominant source of funding for tech and fin-tech startups. The decline of VC investments in new companies during 2020 has seen a marked reversal in 2021, and the trend is anticipated to continue in the next 24 months.
While the size of investments made by VC firms is generally large (usually a minimum of $250k), entrepreneurs must relinquish a degree of ownership and control of their business to the VC firm. Nonetheless, for many tech startups with dreams of becoming unicorns, VC investments are the most sought after funding source.
Crowdfunding is a new trend in the arena of startup financing, and many entrepreneurs are using the strategy to access the funding they need to start and develop their businesses. The basic model is that people donate money to the entrepreneur via an online crowdfunding platform, in order to support the entrepreneur to form a new company, or to implement a specific business idea.
The main advantage of crowdfunding is that business owners have no obligation to pay their supporters back, and indeed the creditor-debtor relationship does not form part of the crowdfunding model. This is a major reason why entrepreneurs choose crowdfunding to finance their businesses, particularly in the early development phase.
There are multiple crowdfunding sites, reflecting the growing popularity of this funding model, so entrepreneurs are advised to perform due diligence, and ensure they understand the relevant terms and conditions.
Startup companies have a wide range of funding options available to them, and keeping abreast of trends in small business financing is crucial for their commercial success. While startups still have the option of harnessing traditional sources of funding from banks, private investors, and government agencies, emerging innovative sources of financing such as crowdfunding have begun to create new, empowering funding possibilities for entrepreneurs.