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Small Business Start Up Financing
The number one question I get asked as a small start-up business coach is: Where can I get start-up cash?
I am always delighted when my clients ask me this question. If they ask this question, it is a sure sign that they are serious about taking 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.
The sources of debt financing loans are many and varied: banks, savings and loans, credit unions, commercial finance companies, and the US Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even if no interest is attached.
Home equity loans are relatively small and short term and are provided based on your guarantee of repayment from your personal assets and equity. Debt financing is often the financial strategy of choice for start-up stage businesses.
Equity financing is any form of financing based on the equity in your business. In this type of financing, the financial institution provides money in exchange for a share of the profits of your business. This means you sell a part of your company to receive funds.
Venture capitalist firms, business angels, and other professional equity financing firms are the primary sources for equity financing. Managed properly, loans from friends and family can be considered a source of non-professional equity funding.
Equity financing includes stock options, and is usually a larger, longer-term investment than debt financing. For this reason, equity financing is more often considered in the growth phase of businesses.
7 Key Sources of Funding for Small Business Start-ups
Investors will be more willing to invest in your startup if they see that you are putting your own money on the line. So the first place to find money to start a business is your own pocket.
According to the SBA, 57% of entrepreneurs used personal or family savings to finance the launch of their company. 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.
There’s no reason why you can’t get outside work to fund your startup. In fact, most people do. This will ensure that there is never a time when you have no money coming in and will help take most of the stress and risk out of the beginning.
If you 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 funding for small business startups. Here, the biggest advantage is the same as the biggest disadvantage: You know these people. The unspoken needs and attachments of the outcome can cause stress that will require moving away from this type of funding.
3. Angel Investors
An angel investor is someone who invests in a business venture, providing capital for startup or expansion. Angels are wealthy individuals, often entrepreneurs themselves, who make high-risk investments in new companies for the hope of a high rate 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 usually do not raise money in a professionally managed fund. Instead, angel investors often organize themselves into angel networks or angel groups to share research and pool 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 contributes capital for a part of the business, but is generally not involved in the operation of the business. A partner is someone who contributes not only capital for a part of the business but also skills and labor in the day-to-day operations.
5. Commercial Loans
If you’re launching a new business, chances are good that a commercial bank loan is somewhere in your future. However, most commercial loans go to small businesses that have already demonstrated a profitable track record. Banks finance 12% of all small business startups, according to a recent SBA study. Banks consider financing individuals with strong credit history, relevant business experience, and collateral (real estate and equipment). Banks require a formal business plan. They also consider whether you have invested your own money in your startup before giving you a loan.
6. Seed Funding Firms
Seed funding companies, 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 usually provides physical space and some or all of these services: meeting area, office space, equipment, secretarial services, accounting services, research library, legal services, and technical services. Incubators include a mix of advice, services and support to help new businesses grow and develop.
7. Venture Capital Funds
Venture capital is a type of private equity funding that is usually given to new businesses to grow professionally, institutionally backed by outside investors. Venture capitalist firms are actual companies. However, they invest other people’s money and much more of it (several million dollars) than seed funding companies. This type of equity investment is usually best suited for fast-growing companies that need a lot of capital or start-up companies with a strong business plan.
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