As Mark Cuban, co-founder AXS TV, quotes, “Sweat equity is the best start-up capital,” let’s face it, no matter how true the quote may stand, we all need that one backup that keeps us going and building castles out of the raw sand. Giving a definite shape to your business idea not only involves an excruciating level of planning but finding the right sources of finance for small business start-ups makes for the real deal. For most budding entrepreneurs, this process can be hard and daunting. What really makes it more frustrating is looking for internal and external sources of finance which do not work.
Here, in this post, we bring forth a list of authentic, tried-and-proven funding sources for small business ventures that actually work. Just remember, finding the right investor for your start-up is a game of patience and endurance. Rejections are part and parcel. The sooner you get over them, the more focused you shall be to attain success.
Types of Sources of Finance
This makes for one of the best types of sources of finance for starting any business, provided if you can afford it. It gives you 100% control over your equity and decision making power of where and how to spend the money. Furthermore, you’re not liable to present any justification to anyone. You also exercise the freedom of operating at your own pace.
Borrowings from Friends or Family
As the name suggests, this money equalizes a loan taken from your spouse, parents, siblings, extended family members or friends. Banks claim this type of funding source as ‘patient capital,’ that needs to be returned/repaid later as the business flourishes and earns steady profits.
But some points are worth consideration here. The first and the foremost of these is borrowing money from a family member or friend can ruin your relationship in the event that your business doesn’t work out as expected or your level of profits is too low to start repaying the borrowed money. Furthermore, you’ll be liable to involve them in your business decisions and/or profit sharing ratio as well. In any case, it’s best to have a formal agreement signed by both the parties on agreed points relating to money, stake in the business and profit distribution.
While there are many internal and external sources of finance that suit all types of business start-ups and entrepreneurs, Venture Capital certainly doesn’t. Right from the very first beginning, it’s vital for you to be aware of the fact that venture capitalists normally look for tech-driven businesses only which speak of high-growth potential, and belong to fields like information technology, biotechnology and communications.
Venture capitalists typically have an equity stake in the company and help carry out business activities as well. They also expect a healthy return on their investment, which is usually guaranteed to them at the beginning of their partnership. If you plan to opt for this type of funding source be sure to partner with a venture capitalist who brings along relevant knowledge and business experience with him/her.
Credits or Loans
If you’re looking for temporary or small investment amount, it’s best to raise it either through your credit cards or home equity loan. While these may seem as easy funding sources for small business ventures, they do come with a ‘Beware’ sign with them. If you fail to repay the amount on time, you could not only ruin your credit score, but also put your home in jeopardy.
Angel investors are usually well-known, wealthy individuals or retired company personnel who hold the key interest in investing in small, start-up ventures. They are often the veterans of their industry and hold extensive experience. Angel investors or simply ‘Angels’ typically invest an amount that falls between $25000 and $100000. In turn of staking such a huge amount, Angels generally reserve the right to supervise the business functions and management practices. They also make for one of the Board of Directors of the company and assume profit sharing.
Otherwise known as Business Incubators, Accelerators usually offer support to start-ups at various stages of development. While there are some that provide high-tech services, there are many that help with other back-end activities such as job creation, revitalization and hosting, and sharing services. Technically speaking, Incubators invite start-ups and other fledgling ventures to share the same space along with their administration, technical resources, and logistics.
Such kind of funding partnership can last up to 2 years. Once a start-up is ready to function independently, it withdraws its services and terminates the contract signed.
Getting such kind of funding is considered as a blessing in disguise. You usually get an access to state-of-the-art sectors such as biotechnology. Multimedia, information technology, and industrial technology. It’s also a fact that businesses that partner with Incubators or Accelerators speak of a better rate of success during their first five years of inception that others.
Of all these internal and external sources of finance one thing is very clear, they call come with their own set of pros and cons. No matter what type of business you’re planning to establish, carefully assessing these sources of finance for small business start-ups is important.
For financial management is at the heart of any business. It is one area that can help drive it forward!