One of the most difficult tasks for a new entrepreneur is raising enough
startup capital to market their
business ideas. Through careful research of funding options, the new
business owner may find several alternatives that may be beneficial for his/her
unique situation. From asking family members and friends to angel investors and
government agencies, there are certainly many ways to raise business capital. However,
the entrepreneur must have a firm commitment to repay any debt owed since being
debt-free will avoid accumulative interest costs. It can also be beneficial to consult
with other small business owners to see how they raised their startup capital.
Many financial institutions provide some type of small business loan. In order to
get funding from a bank, the prospective entrepreneur will need a good credit history
or a co-signer to be approved. Often times, financial institutions will also request
a business plan and financial figures of the prospective company. These documents
will prove that the new business will generate enough cash to make the required
monthly loan payments. While each bank's requirements may differ slightly, a good
credit history, solid business plan, and prepared financial statements are mandatory
to secure a small business bank loan.
Family and friends
Many entrepreneurs are able to raise startup capital for their new businesses simply
by asking friends and family members for financial help. One good thing about family
and friends is that they often want the entrepreneur to succeed in their new business
and can usually give the needed money almost immediately. While this may not be
a viable option for everyone, it is one guaranteed way to quickly raise startup
capital. Of course the entrepreneur needs to be careful about how the agreement
is set up since it may result in relationship problems with the people they know.
It will be beneficial to treat each friend and family member who gave money as a
business relationship, explicitly expressing the interest rate and how the money
will be paid back.
Federal and state grants
The Small Business Administration is a federal agency that can help entrepreneurs
find funding opportunities for
their new businesses. While the SBA does not directly provide any type of funding
for entrepreneurs, they do offer a wealth of resources, including a list of federal
and state grants. These listings are usually very beneficial for new business owners
with prospective non-profit organizations. It can also benefit entrepreneurs who
plan to open businesses in areas of education, public housing, research, and minority
groups. Federal and state grants are highly competitive amongst applicants, and
due to the nature of the grants, it pays to explore this option when
looking for funding.
Angel investors are high net worth individuals who often provide the amount of capital
needed for most small businesses. One advantage of obtaining angel capital is that
it is offered almost immediately with no expensive monthly fees or payments. With
no monthly payments to worry about, the entrepreneur can focus their energy on their
new business and how to make their company grow. Another benefit is that angel investors
use their experience and act as advisors to the young company in guiding it towards
success. In return for their committed capital, angel investors often expect a large
ROI, stock options, and a seat on the board. For those who do not mind the investment
exchange, angel investors can provide the needed startup capital for new entrepreneurs.
Venture capitalists are similar to angel investors in that they can provide the
needed funding for most startups and later-stage companies. However, rather than
use their own personal capital for
investments, they use a pool of money from wealthy individuals. They also
differ from angel investors in terms of the amount invested. While angel investors
can provide a maximum of $500,000 to $1 million or more (especially in angel groups)
venture capitalists are known to invest several millions of dollars on one project.
They, too, expect equity in the form of company stocks, a board seat, and a large
ROI in return for their invested money.
Home equity loan
When an entrepreneur borrows money from their bank and utilizes the equity in their
home as collateral, it is referred to as a home equity loan. As with every financing
option available, there are pros and cons. One positive aspect of a home equity
loan is if the entrepreneur has a lot of property, they will likely be able to obtain
more money for their new business. However, if the business fails, the entrepreneur
may end up losing both the business and their home. This option is quite risky,
and entrepreneurs should only resort to home equity loans if they know for sure
their business will succeed.
401k and IRA
Entrepreneurs can also raise capital for their new businesses by borrowing against
their retirement plans, such as their 401k or IRA. While the option of immediate
approval may be tempting, the money must be paid back with interest over several
years. When people borrow against their retirement plans, they are often giving
up the tax-free privileges of those plans, leaving them with less money and time
to earn interest for retirement. Obviously the danger involved with this practice
can be rather drastic, so the entrepreneur needs to make sure their new business
will be successful. If the business fails, then the borrower will still have to
pay the loan back or face tax fees and other percentage penalties.
There are numerous funding opportunities
available for new entrepreneurs. It is important for anyone who is considering raising
capital for their new venture to conduct a fair amount of research in order to ensure
their new business will not be jeopardized due to a poor funding option.
Sources of funding are available for practically all types of new businesses. By
exploring these different options and selecting an effective form of business capital,
the entrepreneur will be able to find solutions to make their
business ideas a reality.