When it comes to financing a startup business, many entrepreneurs do not have the resources to use traditional sources of capital. While 78% of new business owners had no other resources, many used personal savings or job income to fund their business. Depending on their business plan, they may need to sell their houses or cars to finance the business, rent an apartment above a restaurant, or take out a home equity loan. However, they must still make payments on this loan.
There are many different ways to finance a startup business, but one of the most efficient is to tap into venture capital funds. These types of funds are geared towards startup businesses that have an unpredictably high cash flow and have little brand recognition. Because of this, venture capital is best used by startups with a relatively low amount of history and minimal revenue.
However, this type of financing is not ideal for established businesses that need quick cash to survive or expand, as it is considered debt, not equity.
Obtaining venture capital can be a lengthy process. The process begins with an initial meeting with a VC principal, followed by more meetings, conversations, and presentations to the other VC partners. Then, the company needs to negotiate a term sheet, which involves numerous legal documents and continuing due diligence. However, the process is worth it when the startup can demonstrate its potential and can convince the venture capitalists to invest.
Business term loans
One of the best ways to finance a startup business is by taking out a business term loan. These loans, similar to student loans, let you pay back the loan amount in equal installments over a specified period of time. They are available from banks, credit unions, and online lenders, including private investors. These loans can be used for a variety of purposes, including startup business investments, staff hiring, and opening a first business premises.
Before acquiring startup business loans, it is important to determine the purpose of the funds. While you might be tempted to apply for more than you need, it’s better to only borrow what you need to start your business. Make sure you get a loan that covers the costs of operating your business. You should always choose a lender that offers a business term loan with competitive terms. Alternatively, you can borrow from a friend or relative. When taking out this type of loan, you should ensure that you meet all requirements set by the lender.
If you’re starting a new business, equity financing may be the best option for you. Angel investors prefer companies that can grow rapidly, and equity financing allows you to scale your business quickly. Unlike debt financing, you don’t have to repay your investors until you’re profitable. This makes it a better option for startups who need startup capital and want to avoid relying on high-interest credit cards. But it’s not always easy to secure startup funding.
In many cases, startups need several rounds of equity funding to raise the money they need. These equity rounds will typically involve selling common stock, convertible preferred stock, or equity units that combine common and warrant shares. Later, a startup business will need venture debt to secure additional funds. Depending on the stage of the business, investors will use different stock instruments to raise capital. Because equity funding doesn’t require repayment, it’s a good choice for start-ups that want to attract long-term partners.
Friends and family
In a Kauffman Foundation survey, 40 percent of all startup funding comes from friends and family, and on average, each person puts in $23,000 in the company. However, mixing personal relationships with money is risky, so entrepreneur should be clear about the risks. In general, a friend or family member will contribute between $1,000 and $25,000, but the amount can be more. A written agreement should be signed before the money is disbursed.
Getting funding from friends and family is a great way to get a business off the ground without using bank loans. Family and friends are typically supportive of new businesses, but don’t pressure them into investing in the business. Not all of them will want to invest, so give them a way out if they don’t feel comfortable investing. Remember, you have no way of knowing whether the money will work out for you.