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4 Business Funding Challenges and How to Overcome Them

Vivek Patel

12 min. read

Updated December 19, 2024

Innovative products and business models are the foundations of a promising startup. However, you’ll also need a steady flow of funds, especially in the early stages, to turn those ideas into reality.

Funding is crucial for improving technology, hiring the right people, and launching a comprehensive marketing strategy to get a foothold in the market. But securing enough money to start your new venture can be difficult.

As an entrepreneur, you will face several challenges while seeking the funds, in part because you’ll have to convince others that your idea is a solid investment. Here are some of the most common challenges that entrepreneurs face when seeking funding, and how you can navigate them to secure the funding you need.

1. Creating a scalable business model

Whether you are hoping to expand a small business with a bank loan or going for a round of venture capital funding, you will need a scalable business model. Investors in particular only want to fund scalable or ready-to-scale businesses. Your business model must show the potential to increase revenue with minimal added expenses in the coming months or years.

It’s easy to overestimate how much money you’re going to make in the next year based on what you made last quarter. You get excited, and you want to immediately say a “magic number” to investors or the bank to get them on board. However, you need to analyze this number from every angle — there are too many variables that could mess up your projection.

Your business idea itself needs to be scalable

This means being able to increase profits without increasing costs at an equal (or higher) rate. It doesn’t matter how unique your idea is. Without the potential for scalability, it is less likely to be investable.

Usually, scalable business models have higher profit margin and lower infrastructure and marketing costs. While expanding, your business model needs to remain aligned with the company’s core offerings.

In other words, if your business model is likely to result in the overextension of time, money, and resources, potential funders will be hesitant to invest in you.

Build a business model that works; don’t rely on using your competitor’s model

Your business model should support your growth goals. Staying competitive might require you to approach your goals from a different angle.

For example, Bluestone, an online jewelry startup from India, was trying to compete with the traditional brick and mortar jewelry business market. So they decided to focus on a made-to-order business model. This way, they didn’t have to maintain a very costly inventory. They sought investment to develop a state of the art manufacturing facility and supply chain so they could manufacture online orders in real time.

Try to outsource non-strategic aspects of your business to minimize expenses

In a restaurant, for instance, having a stylish interior is a strategic aspect of your business. However, having an in-house accountant may not be the best use of funds.

Use a billing software to record the sales and invest in a relationship with a tax professional only when needed. Make sure to use the latest automation and software technologies wherever it makes sense. All of these factors contribute to a scalable business model, which in turn helps attract investors.

2. Determining how much money to ask for

Whether you are asking angel investors to fund your expansion or seeking a bank loan, you must know how much money you need. Most people would say you should raise as much money as you can. However, in many cases, more isn’t always better.

With bank financing, too much money could saddle you with hefty interest payments. For businesses seeking an investor, setting too high a valuation during a funding round can set you up for failure, setting expectations too high for ensuing rounds. It might be difficult to exceed your valuation, making investor relations difficult.

Write a business plan

Obtaining funding should start with a solid business plan. If you write a convincing business plan, then your chances of obtaining funding are greatly enhanced. Lenders and investors want to see proof that customers want your product or service and are willing to buy it for a price at which you can make a profit. The more tangible evidence you offer of this claim, the better chance you have.

In fact, most investors (and zero banks) will refuse to fund your venture without a complete business plan.Your business plan also needs to have realistic financial forecasts. You should forecast the expected cost the investment or loan will cover, and the returns it will generate in future. The projected statistics, facts, and figures must have a justification.

Be specific and concrete

When investors pay you, they expect to see how you plan to spend their money. They will expect you to spend the funds to grow your business to its next milestone.

In other words, they wouldn’t be impressed if you intend to invest in fancy furniture or unnecessary automation. Milestones need to be measurable achievements such as launching a new product or reaching a specific market share.

Every business will have a few rollercoaster moments. However, your business should be able to show consistent achievements.

Demonstrate that your company has positive cash flow 

Showing that you are cash flow positive is key, especially for small startups and small businesses looking for expansion. There is no single approach here. Usually, better cash flow increases the chances of receiving desired funding.

Calculate how much money you will need for the necessary production, training, hiring, marketing, and automation to create a viable financial model. Figure out where your cash flow bottoms out and add appropriate buffers accordingly. This will help ensure your funding request is in line with your financial projections. 

More investment isn’t always better

More funding can equate to increased pressure to scale up your business quickly. Although it can be helpful for healthy growth, sometimes it can prove detrimental — companies that have received huge amounts of investment fail every day because they couldn’t manage their rapid expansions.

The bottom line is to ask for the amount of money your business needs and can handle.

Timing also matters

I’ve been unlucky enough to screw up by both funding my startup too early and too late. Both are horrible for your company. Timing is everything for valuation, market, and team. Evaluate when is the best time to raise money. Give yourself six to eight months to raise each and every time. I know even amazing companies that took six months to raise funds. It doesn’t happen overnight.

3. Finding the right funding option

As mentioned in the beginning, many new startup funding options are available today. To increase your chances of getting the funds, you need to choose the most suitable funding alternative. Sometimes, you may also need to use more than one option to fund your startup.

Investors are very good at their job: maximizing their return. When you only have one option, you will get squeezed because you have no leverage. Create urgency by ensuring competition on both sides of the deal.

Bootstrapping or self-funding

The best (and the cheapest) option for funding your business is using your own savings, or borrowing from your family and friends. Flexible investment terms and quick availability makes it an attractive funding source.

Your own savings and income

Tapping into your 401(k) or personal savings may seem tempting. However, if things don’t pan out, you lose your business and also your nest egg. Many entrepreneurs choose to both run their startup and work a day job until their startup is profitable.

Family and friends

Asking your family and friends to invest in your startup also comes with considerable risks. You are not only risking their financial future but also potentially jeopardizing personal relationships.

You can, however, readily overcome these risks by writing a formal business plan just like the one you would use to attract professional investors. Then, handle the loan with professionalism. Document the terms (particularly what will happen if you can’t pay back the money) and stick to your agreement.

Credit cards

Your bank may offer special credit cards for individual entrepreneurs and small business owners. If you have good credit, it can be a simple option. It is also the most expensive option, as credit card debt comes with high-interest rates.

Most credit cards are also personal, meaning that if your business goes bankrupt, you are still personally liable for any debt. Plus, your credit score will take a hit the moment you miss a payment, which can significantly hamper your ability to secure funding in the future.

Bank loans

A bank loan is also a reliable funding option for a small business or startup. You may also be able to apply for government-subsidized bank loans or soft loans.

Small Business Administration (SBA) loans can be a good option. The SBA doesn’t actually administer loans, but when you apply for an SBA backed loan from your bank, the SBA promises to pay back a portion of the loan to the lender if you default. Basically, this makes it possible for banks to take a risk on granting a loan to a small business that might not otherwise qualify.Most traditional bank loans require at least two years of tax returns showing gross and net profits. In other words, you need a good credit history. Banks will also ask for collateral such as equipment or real estate. They will always ask you for your full, traditional business plan. Make sure it includes financial statements or projections, personal and business credit reports, tax returns, bank statements, and growth projections.

Venture capital

Venture capitalists are institutional investors that invest in businesses by acquiring ownership stakes, typically through the purchase of equity in the business. VCs can provide guidance in growing your business, but they’ll also probably be interested in having a say in how your business operates.

Most VC firms will rarely invest in small businesses such as coffee shops, bars, and proprietary stores because they’re not built on business models that are designed for rapid growth and huge expansion. But, if your coffee brand is trying to expand into a super chain like Starbucks, for example, they might be keenly interested in investing.

Keep in mind that venture capital firms will invest at a point when injecting more capital into your business will result in further growth and more profit.

Angel investors

Angel investors may offer more flexible investment terms compared to the venture capital firms. They tend to invest smaller sums of money than venture capitalists (but no more than $1 million) in exchange for equity in the startup. Depending on the agreement, angels may or may not acquire an ownership stake in the business they’re investing in.

Like with VCs, angel investors will likely have a say in how the business is run, and they’ll be highly interested in your exit strategy, as they will make the majority of their money when your business is sold.

Whether seeking angel or venture capital investment,  It’s important to be as informed as possible about the historic investments of potential investors. I have made the mistake of not doing enough upfront research about an investor, which hurt our fundraising efforts. Our pitch didn’t fit their expectations or budget. We now structure time for due diligence to manage expectations appropriately.

Crowdfunding

Crowdfunding can help you to reach a broad group of potential investors, and even generate publicity for your startup. However, crowdfunding campaigns require a significant amount of time and planning, and your ability to achieve funding often rests on whether you already have a wide network that you can access to ask for support. Plus, some platforms mandate that if your campaign fails to raise the target amount, you don’t receive any funding at all.

To succeed, you must make your campaign visible, measurable, and understandable. Having a well-established network of friends and professional contacts can increase the chances of a successful campaign.  

Each option comes with a distinct set of advantages and disadvantages. You will have to make your decision based on your particular situation — and, as mentioned, you might opt to seek several different types of funding.

4. Spending wisely once you’re funded

Stick to your plan

If you took investment, you’re accountable to your investors to do what you said you would do with their funds and to be transparent if you’re thinking of changing course.

Avoid going on a spending spree. Don’t spend the money on overly expensive furniture, workspace, infrastructure, equipment, business trips, and lunches. Save the splurge for when you’re bringing in more revenue.

Spend wisely on tech

If you haven’t assessed your technology needs already, you need to do it before spending the funds.

Find out what type of software and hardware upgrades are available for your business and choose the most affordable yet feature-rich options. Technology spending should always focus on future marketing and branding successes.

Keep your investors in the loop

If you decided to seek outside investment, chances are your contract requires you to give investors their proper return in due time. However, showing them that their money is being put to good use in the interim will help forge a bond of trust.

Other factors that improve your chances to get funded

Here are some additional things to do in your business plan to improve your chances of getting funded:

1. 1.Your plan should show good profit potential in a short period of time.
2. 2.The higher the rate of return you can offer investors and the faster you can produce it, the better your chances. Your plan should target a clearly defined market with enough size and purchasing power to produce a profit.
3. 3.Investors also prefer large markets with high growth potential. They avoid businesses that attempt to be “everything to everybody.” Your plan should clearly explain the “competitive edge” your product or service has over rivals.
4. 4.You should show an ability to control both the delivery and the quality of the product or service. Also, show that managers and employees have the skills and the experience to make the company a success.
5. 5.Show that you have made a personal investment in this business venture.
6. 6.If you don’t believe in your own venture enough to invest at least some of your own money in it, how can you expect others to? “Sweat equity” — unpaid personal time and hard work — can be important, but lenders and investors like to see an entrepreneur with an important financial stake in the business. It’s a tremendous source of motivation.
7. 7.Lay out a clear, well-conceived, workable strategy for getting this business up and running. Show realistic financial projections covering most likely, pessimistic, and optimistic scenarios.
8. 8.Potential lenders and investors want to be sure that the “dollars and cents” of the deal make sense, and that’s why realistic projections are important. Most entrepreneurs underestimate the amount of money needed for startup costs. Don’t get caught short!

Parting words

Funding your startup or business idea is a tough nut to crack. Whether you are approaching a venture capital firm or trying your luck on a crowdfunding site, you will come across multiple hurdles while in search of funds.

The above tips will help you overcome the most common startup funding challenges and secure capital for your business in due time.

Vivek Patel