As a coach to small businesses starting up, my number one question is: Where can I get start money?
This question is always a welcome one from my clients. This is a sign that they are serious about starting financial responsibility.
Not all money is created equal
There are two types: equity and debt. It is important to decide which type of start-up financing is best for your needs.
The borrowing of money to finance a company is called Debt Financing. Any money you borrow can be considered debt financing.
The most common sources of debt financing loans include banks, savings, loans, credit unions as well as commercial finance companies and the U.S. Small Business Administration. Even if there is no interest, loans from family and friends can be considered debt financing.
These loans are short-term and relatively small in size. They are granted based upon your guarantee of repayment using your equity and personal assets. For businesses that are just starting out, debt financing is often the best financial option.
Equity financing refers to any type of financing that is based upon your company’s equity. In equity financing, the financial institution lends money in exchange for a percentage of your company’s profits. In other words, you will need to sell a part of your company in order for the financial institution to provide funds.
Venture capitalists, business Angels, and other professional equity fund firms are some of the most common sources of equity financing. When handled properly, loans from relatives and friends can be considered non-professional sources of equity funding.
Equity financing can be described as stock options. It is typically a higher-risk, longer-term investment option than debt financing. Equity financing is often used in the growth phase of businesses.
7 Key Sources of Small Business Start-up Funding
Investors are more likely to invest in your business if you have invested your own money. Your own money is the best place to start a business.
The SBA estimates that 57% of entrepreneurs use family or personal savings to fund their business’s launch. Don’t spend all of your money if you don’t want to. This will prevent you from eating Ramen noodles all your life. It will also give you valuable experience borrowing money and help you build credit.
There is no reason to think you shouldn’t be able to get an outside job in order fund your start up. In fact, most people do. This will make sure that you have enough money to go around and reduce the stress and risk associated with starting a business.
You should shop around to find the best interest rate if you plan on using plastic.
2. Friends and Family
Small business start-ups are most likely to get funding from family and friends. The greatest advantage of this source is also the largest disadvantage. You know the people. This type of funding may be resisted if there are unspoken needs or attachments to the outcome.
3. Angel Investors
An angel investor is someone who makes a capital investment in a company venture. This can be for either expansion or start-up. Angel investors are wealthy individuals who invest in high-risk companies with the hope of high returns on their capital. They often become the first investors in a company. Their contacts and expertise adds value. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Angel investors organize themselves into angel networks and angel groups to collaborate on research and pool investment capital.
4. Business Partners
You have two options for partners in your business: working and silent. Silent partners are those who contribute capital to a part of the business but are not directly involved in its operation. A working partner contributes capital to a portion of the company, but also skills and labor for day-to-day operation.
5. Commercial loans
There are likely to be a commercial loan available if you’re starting a new business. Commercial loans tend to be given to small businesses that have a track record of success. According to a recent SBA survey, banks finance 12% of all start-ups. Individuals with solid credit histories, entrepreneurial experience and collateral (realty and equipment) are eligible for bank financing. Banks will require a formal business plan. Before they approve you for a loan, they will consider whether or not you are investing your own money into your start-up.
6. Seed Funding Firms
Incubators are seed funding companies, also known by the name incubators. They encourage entrepreneurship, nurture business ideas, and help to attract venture capitalists. A typical incubator provides meeting space, office space and some or all the following services: secretarial, accounting, legal, technical, and research libraries. Incubators provide support, advice and service to assist new businesses in developing and growing.
7. Venture Capital Funds
Venture capital is a form of private equity financing that is typically provided by outside institutionally-backed investors to new growth companies. Venture capitalists are actually companies. Venture capitalists invest money from other people, and often in much greater amounts (a few million dollars more than seed funding companies). This type is ideal for start-ups or rapidly growing businesses that need a lot capital.