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 happy when my clients ask me this question. If you are asking yourself this question, it is a sure sign that you are serious about the financial responsibility of starting it.
Not all money is the same
There are two types of seed 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 finance 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 when there is no interest attached.
Debt finance loans are relatively small and short term and are made based on your guarantee of payment of your personal assets and principal. Debt financing is often the financing 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 your business profits. Basically, this means that you will sell a part of your company 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 source of non-professional equity financing.
Equity financing involves stock options and is typically 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 Financing for Small Business Startups
1. you
Investors are more willing to invest in your startup when they see that you have put their 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 starting 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 fund your startup. In fact, most people do. This will ensure that there will never be a time when you don’t have money and will help take most of the stress and risk out of getting started.
Credit cards
If you’re 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 funding for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: you know these people. Unspoken needs and outcome attachments can cause stress that would justify moving away from this type of funding.
3. Angel investors
An angel investor is someone who invests in a business venture and provides start-up or expansion capital. Angels are wealthy people, often entrepreneurs, who make high-risk investments in startups in hopes of earning high rates of return on their money. They are often early investors in a company and add value through their contacts and experience. Unlike venture capitalists, angels typically don’t pool money in a professionally managed fund. Rather, angel investors often organize themselves 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 contributes capital to a part of the business, but is generally not involved in the operation of the business. A worker partner is someone who contributes not only capital for a part of the business, but also skills and manpower in day-to-day operations.
5. Commercial Loans
If you’re launching a new business, there’s a good chance you’ll have a commercial bank loan at some point in your future. However, most business loans go to small businesses that already have 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’re investing your own money in your startup before giving you a loan.
6. Startup Financing Companies
Seed funding companies, also called incubators, are designed to encourage entrepreneurship and encourage 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, 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 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 seed funding companies. This type of equity investment is typically more suitable for fast-growing businesses that require a large amount of capital or startups with a solid business plan.