Small business start-up financing
The number one question I get asked as a small business start-up coach is: Where can I get start-up cash?
I am always glad when my clients ask me this question. If they ask themselves this question, it’s a sure sign that they are serious about the financial responsibility of starting it.
not all money is equal
There are two types of start-up financing: debt and equity. Consider which type is right for you.
Debt financing is the use of borrowed money to finance a business. Any money you borrow is considered debt financing.
Sources of debt financing loans are many and varied: banks, savings and loans, credit unions, trade finance companies, and the US Small Business Administration (SBA) are the most common. . Loans from family and friends are also considered debt financing, even when there is no interest attached.
Debt financing loans are relatively small and short term and are made based on your guarantee of repayment of your personal assets and principal. Debt financing is often the financial strategy of choice for start-up stage businesses.
Equity financing is any form of financing that is based on the capital of your business. In this type of financing, the financial institution provides money in exchange for a portion of the profits from your business. Basically, this means that you will sell a part of your company in order to receive funds.
Venture capital firms, business angels, and other professional equity financing firms are the standard sources of equity financing. Handled correctly, loans from friends and family could be considered a non-professional source of capital financing.
Equity financing involves stock options and is generally a larger, longer-term investment than debt financing. Because of this, equity financing is most often considered in the growth stage of companies.
7 Top Sources of Funding for Small Business Startups
1. you
Investors are more willing to invest in your startup when they see that you have put your own money on the line. So the first place to look for money when starting a business is your own pocket.
Personal property
According to the SBA, 57% of entrepreneurs dip into their personal or family savings to pay for the launch of their business. If you decide to use your own money, don’t use all of it. This will protect you from eating ramen noodles for the rest of your life, give you a great borrowing experience, and build your business credit.
to work
There is no reason why you can’t get an outside job to finance your startup. In fact, most people do. This will ensure that there will never be a time when you are broke and will help take most of the stress and risk out of getting started.
Credit cards
If you are going to use plastic, shop around for the lowest interest rate available.
2. Friends and family
Money from friends and family is the most common source of non-professional financing for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: you know these people. Unspoken needs and attachment to results can cause stress that would justify moving away from this type of financing.
3. Angel investors
An angel investor is someone who invests in a business venture and provides start-up or expansion capital. Angels are wealthy individuals, often entrepreneurs, who make high-risk investments in startups in the hope of earning high rates of return on their money. They are usually the first investors in a company and add value through their contacts and experience. Unlike venture capitalists, angels generally don’t pool money in a professionally managed fund. Rather, angel investors often organize into angel networks or angel groups to share research and raise investment capital.
4. Business partners
There are two types of partners to consider for your business: silent and working. A silent partner is someone who provides capital for a part of the business, but is generally not involved in the operation of the business. A working partner is someone who provides not only capital for a part of the business, but also skills and manpower in day-to-day operations.
5. Business Loans
If you’re launching a new business, there’s a good chance you’ll have a loan from a commercial bank at some point in your future. However, most business loans go to small businesses that already show a profitable track record. Banks finance 12% of small business start-ups, according to a recent SBA study. Banks consider financing people with a strong credit history, related business experience, and collateral (real estate and equipment). Banks require a formal business plan. They also take into account whether you are investing your own money in your startup before giving you a loan.
6. Startup Funding Companies
Seed funding companies, also called incubators, are designed to foster entrepreneurship and nurture business ideas or new technology to help make them attractive to venture capitalists. Typically, an incubator provides physical space and some or all of these services: meeting areas, offices, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a combination of advice, service and support to help new businesses develop and grow.
7. Venture Capital Funds
Venture capital is a type of private equity financing that is typically provided to new growth companies by institutionally backed professional outside investors. Venture capital firms are real companies. However, they invest other people’s money and much larger amounts (several million dollars) than startup funding companies. This type of equity investment is typically best suited for fast-growing companies that require a large amount of capital or start-ups with a solid business plan.