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The number one question I get asked as a small business start-up coach is: Where do I get the start-up cash?
I’m always glad when my clients ask me this question. If they are asking this question, it is a sure sign that they are serious about taking on the financial responsibility to start this.
not all money is created 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, commercial finance companies, and the US Small Business Administration (SBA) are among the most common. Loans taken from family and friends are also considered debt financing, even if there is no interest attached.
Debt financing loans are relatively small and short term and are given on the basis of your personal assets and equity guaranteeing your repayment. Debt financing is often the financial strategy of choice for start-up stage businesses.
Equity financing is any type of financing that is based on the equity in your business. In this type of financing, the financial institution provides money in exchange for a share of your business profits. This essentially means that you will be selling a part of your company in order to obtain the money.
Venture capitalist firms, business angels and other professional equity funding firms are standard sources of equity financing. Handled correctly, loans from friends and family can be considered a source of non-professional equity funding.
Equity financing includes stock options, and is typically a larger, longer-term investment than debt financing. Because of this, equity financing is more often considered in the development stage of businesses.
7 Main Sources of Funding for Small Business Start-ups
1. you
Investors are more inclined to invest in your start-up when they see that you have put your money on the line. That’s why the first place you look for money when starting a business is your own pocket.
personal property
According to the SBA, 57% of entrepreneurs dip into personal or family savings to pay for their company launch. If you decide to use your own money, don’t use it all up. It’ll save you a lifetime of eating ramen noodles, give you a great money-borrowing experience, and build your business’ credibility.
a job
There’s no reason why you can’t get an outside job to fund your start-up. In fact, most people do. This will ensure that there will never be a time when you are coming up with no money and will help take most of the stress and risk out of starting a startup.
Credit Card
If you’re going to use plastic, buy at the lowest interest rate available.
2. Friends and Family
The most common source of non-professional funding for small business start-ups is money from friends and family. The biggest advantage here is the same as the biggest disadvantage: You know these people. Unspoken needs and attachment to results can lead to stress that will warrant staying away from this type of funding.
3. Angel Investors
An angel investor is someone who invests in a business venture, start-up or provides capital for expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies in 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 typically do not pool money into professionally managed funds. 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 one who contributes capital to a share of the business, yet is not usually involved in the operations of the business. A working partner is one who not only contributes capital as a part of the business but also contributes skill and labor in the day-to-day operations.
5. Commercial Loan
If you’re starting a new business, chances are good that a commercial bank loan is somewhere in your future. However, most business loans go to small businesses that are already showing a profitable track record. According to a recent SBA study, banks finance 12% of all small business start-ups. Banks consider financing individuals with a solid credit history, relevant entrepreneurial experience, and collateral (real estate and equipment). Banks require a formal business plan. They also consider whether you are investing your money in your start-up before giving you a loan.
6. Seed Funding Firm
Seed funding firms, also known as incubators, are designed to encourage entrepreneurship and develop business ideas or new technologies to make them attractive to venture capitalists. An incubator typically provides physical space and some or all of the following services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators include a mix of mentoring, service and support to help new businesses grow and develop.
7. Venture Capital Fund
Venture capital is a type of private equity funding typically provided by professional, institutionally backed outside investors to new growth businesses. Venture capitalist firms are actual companies. However, they invest other people’s money and much larger amounts of it (several million dollars) than seed funding firms. This type of equity investment is usually best suited for fast-growing companies that require a lot of capital or start-up companies with a strong business plan.
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