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Start-Up Financing for Small Business
Some questions that small business persons do ask are like; where do I get start-up cash? If they are asking this question, it is a sure sign that they are serious about taking financial responsibility for starting it. Small business financing is often the only way for some businesses to get the capital they need to open their doors, expand operations, or develop new services and products. However, the Great Recession created some significant hurdles for personal and business loan applicants who boasted less-than-perfect credit scores.
Many small businesses face the prospect of going under if they are not able to secure proper financing. The need for quick cash injections to keep a small business running can continue even after the first few loans are acquired. However, with each loan taken it becomes increasingly difficult to get a new loan approved. Also, the number of banks and financial intuitions which are willing to lend money to small businesses are rapidly shrinking.
There are two types of start-up financing: debt and equity. Consider what kind 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 investments, credit unions, commercial finance companies. 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 in term and are awarded based on your guarantee of repayment from your assets and equity. Debt financing is often the financial strategy of choice for the start-up stage of businesses.
Equity financing
is any form of funding that is based on the equity of your business. In this type of financing, the financial institution provides money in return for a share of your business’s profits. This essentially means that you will be selling a portion of your company to receive funds. Venture capitalist firms, business angels, and other professional equity funding firms are the standard sources for equity financing. Handled correctly, loans from friends and family could be considered a source of non-professional equity funding. Equity financing involves stock options and is usually more substantial, longer-term investment than debt financing. Because of this, equity financing is more often considered in the growth stage of businesses.
The Main Sources of Funding for Small Business Start-ups are:
You
Investors are more willing to invest in your start-up when they see that you have put your own money on the line. So the first place to look for money when starting up a business in your pocket. Personal Assets. Entrepreneurs dip into personal or family savings to pay for their company’s launch. If you decide to use your own money, don’t use it all. This will protect you from eating Ramen noodles for the rest of your life, give you great experience in borrowing money, and build your business credit.
A Job
There’s no reason why you can’t get an outside job to fund your start-up. Most people do. This will ensure that there will never be a time when you are without money coming in and will help take most of the stress and risk out of starting up.
Credit Cards
If you are going to use plastic, shop around for the lowest interest rate available.
Friends and Family
Money from friends and family is the most common source of non-professional funding for small business start-ups. Here, the most significant advantage is the same as the biggest disadvantage: You know these people. Unspoken needs and attachments to outcome may cause stress that would warrant steering away from this type of funding.
Angel Investors
An angel investor is someone who invests in a business venture, providing capital for start-up or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies for the hope of high rates of return on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Instead, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.
Business Partners
There are two kinds of partners to consider for your business: silent and working. A silent partner is someone who contributes money for a portion of the company, yet is generally not involved in the operation of the business. A working partner is someone who provides not only capital for part of the business but also skills and labor in day-to-day operations.
Commercial Loans
If you are launching a new company, the chances are good that there will be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that are already showing a profitable track record. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral. Banks require a formal business plan. They also take into consideration whether you are investing your own money in your start-up before giving you a loan.
Seed Funding Firms
Seed funding firms, also called incubators, are designed to encourage entrepreneurship and nurture business ideas or new technologies to help them become attractive to venture capitalists. An incubator typically provides physical space and some or all of these services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a mix of advice, assistance, and support to help new businesses develop and grow.
Venture Capital Funds
Venture capital is a type of private equity funding typically provided to new growth businesses by professional, institutionally backed outside investors. Venture capitalist firms are actual companies. However, they invest other people’s money and much more significant amounts of it than seed funding firms. This type of equity investment usually is best suited for rapidly growing companies that require a lot of capital or start-up companies with a healthy business plan.
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