One of the keys to starting up a successful business is to begin with secure and appropriate financing. Raising capital, the most basic entrepreneurial activity, may seem extremely daunting to a new entrepreneur. Regardless, all companies must start out with money. So where do entrepreneurs find money to start up their own companies? Although many may not realize it, the opportunities to finding money are endless.
First, an entrepreneur must know what their startup expenses are. This determines the amount of money needed to raise capital. The most basic startup expenses include rent, utilities, research, development, marketing costs, technological expenses, and employee payroll and benefits. Other start-up expenses include legal and professional fees and basic living salaries. Without a doubt, these expenses can add up, especially when the company is so young. By having a solid business plan as well as an accurate feel for what startup expenses will be, entrepreneurs already have a one-up on raising more capital for their business. Once this groundwork is laid out, a business owner should begin researching the different types of financing they can use for their new business. These capital-raising opportunities include equity financing, debt financing, bank loans, government funding, and the development of advertisements.
Equity financing, in simple terms, is an exchange of money for a piece of ownership in a new business. This can be done by venture capitalists, angel investors, friends, family, or through personal funding.
Venture capitalists and angel investors
Venture capitalists and angel investors can help bring capital to your new business. However, when they invest in the equity of a business, both tend to expect a large return on investment, usually in the form of an acquisition, IPO or stock buy-back in the future. In addition, using venture capitalists and angel investors give up the company's rights since both desire such a large stake in the company. Therefore, by using these resources, an entrepreneur may lose partial autonomy over their new business.
Funding personally for a new business, also known as "bootstrapping" (since entrepreneurs are pulling themselves up by their own bootstraps), is another type of equity financing. Money from personal checking or savings account, credit card, or retirement accounts can be obtained for a new business. In addition, equity can be collected from real estate properties, vehicles, recreational equipment, and even rare collectables. Surprisingly, many entrepreneurs use this "bootstrapping" strategy when starting up their own businesses.
Help from Friends and Family
Loans can be made available quite quickly through friends and family. These people know the entrepreneur personally and usually want to help out with their new business venture. The downfall to using friends and family through loans is that it could cause these newfound "investors" to have a say in every company decision. Likewise, resentment and relationship strains can follow.
A second way of raising capital for a new business is through debt financing. Debt financing is made up of loans offered by banks and accredited government agencies (for instance, the Small Business Administration , or SBA).
Loans from a bank are classified according to the size of the planned business (for example, there are start-up business loans, small scale business loans, large business loans, and new business loans). Loans can also be classified as secured or unsecured. The relationship between the entrepreneur and the financial institution (usually a bank) lasts the life of the loan and only ends when the business owner pays back the entire amount. Bank loans allow maximum control over your own business and are tax-deductable. Unfortunately, high debt may look unattractive to other investors involved in the project.
Recently, banks have been offering online loans as well. This requires an application process. Once the application is complete, the information is analyzed for approval or rejection and is then transmitted through a secure server. An online calculator can be found on most bank loan websites to find the costs of monthly payments or how much funding will be needed.
Many government loans are given to entrepreneurs through the Small Business Administration. In fact, the SBA has financed more than 219,000 new business owners with loans of more than $45 billion. In the past decade alone, the SBA has helped finance 435,000 new businesses with more than $94.6 billion in loans. The SBA acts as a guarantor, and instead of lending money directly to new businesses, it uses a network of local lending partners to finance new businesses.
One final way of raising capital includes advertising. Advertising in a newspaper of a national publication with the amount of money you want, the type of business that is involved, and the kind of return you are promising on the investment can be quite effective. Advertisements can also be done on the Internet. In fact, several websites offer match-up services for investors and capital-seekers.
There are dozens of opportunities for raising your new business's capital. With the right selection on financing for your business, your entrepreneurial ventures can become a great success, even if that means pulling yourself up by your bootstraps.