Entrepreneurs got business ideas for startup in my previous post, and now here is how you can get money to start your business. One of the major hurdles in starting a business is often financing. A business can have a sharp business plan and good products, but none ofit will matter without proper funding to maintain the business.
To get funding, or capital, for a new business there are multipleresources, but each has limits. You should also remember good businesspractices include honoring debts and meeting obligations to investors.
To determine what the best financing options are for your business,have a detailed financial analysis in your business plan. To learn moreabout business plans and finances, see Developing a Business Plan and Personal vs. Business Finances.
Financing resources can be grouped into four rankings based on the responsibilities of the business owner.
1. Personal Assets
This is the preferred financing option. The business owner isaccountable to him or herself and no profits from the business need tobe paid to another person. So if the investment doesn’t show a return,the business owner is the only one out of any money. Remember, do notinvest anything you are not willing to lose. It is one thing to losemoney or equipment and another to lose your home.
Personal Financing Options:
- Selling investments
- Selling some assets
2. Friends and Family
This option requires paying others from your profits, but it does not hold the rigidity of a professional lender who needs guarantees orcollateral. Friends and family already know you and your abilities andcan judge for themselves if your business plan is stable. While a friend or relative may be more likely to be sympathetic should your businessexperience an unavoidable downturn, you should still honor yourcommitments. You do not want to risk losing friends and alienatingrelatives.
Things to Remember:
- Do not borrow an amount the person cannot afford to lose.
- Before someone invests, ask them how they would handle a situation where yourbusiness does not succeed and you could not pay them back immediately or at all.
- Set clear terms for the loan, and if it is a largersum, have an attorney draw up a legal agreement. Having things inwriting is better than relying on memory to settle any disagreements.Make expectations clear so there is less chance of a disagreement in the future.
3. Equity Finances
These are funds received from people who will be given part ownership in the business in exchange for their help. This option does notnecessarily mean the investor will be given portion of the profits, butit does mean the investor will have some control over businessdecisions. With any arrangement like this, the expectations must beclearly defined to avoid misunderstandings. For example, does a personwant to be involved with the day-to-day administrations of the businessor does he/she want to be a silent partner with little or no say in howthe business is run?
Recommended: How To Optimize Corporate Taxation & Expenses?
4. Debt Financing
This is traditional lending where the business owner has to apply to a bank or company and qualify for a loan. The business owner then has topay back the loan plus interest in regular payments
Types of Lenders:
- Financial Institutions – Look for companies and bankswith loans specifically designed for small businesses. Organizations orassociations for small businesses can be a good place to learn aboutloan programs in your area.
- Microcredit Organizations –Microfinance is designed to give small loans to those who don’t normally qualify for traditional loans from larger banks. These are commonaround the world, but are rarer in the U.S. and Canada. Some microcredit organizations focus on loaning to groups of business owners who have limited business experience, education, or collateral. A group works together to payback loans and supports each other. Groups also meet regularly todiscuss their businesses and share their knowledge with each other.
- Organizations that Specifically Lend to People in Your Situation – These are groups (private or government) that give loans based onspecific requirements. For example, a business might receive funding ifit promotes local artists or if a single mother is running the business. Sources for this type of funding could include government grants andsome microcredit organizations depending on what is available in yourarea. Other possible factors are income, working in a specializedindustry, or living in a particular geographic area.