Start-Up Financing

As published on eHow Money

You’ve heard the expression “it takes money to make money,” and this is certainly true with start-up businesses. Most business find they operate for a while–sometimes months or years–before they start making a profit. Thus, entrepreneurs are faced with the challenge of financing their businesses during the start-up phase. This is a challenge, but entrepreneurs have several options and should know the risk and benefits of each one before choosing how to proceed.

 

  1. Bootstrapping

    • Many entrepreneurs are able to finance their start-ups with their own savings. This option is the easiest for businesses that don’t require a lot of equipment, inventory or rented space. Small start-ups that can operate from a home office, such as a creative consulting business, are the best candidates for this type of funding. The benefit of not taking on any debt to start a business is balanced by the risk of running low on cash flow and being unable to pay the businesses expenses.

    Friends and Family as Investors

    • Some entrepreneurs look to their friends and families for outside funding. The benefit of this type of financing is that it can be very flexible–entrepreneurs may find that their friends and family are willing to agree to more lenient loan terms than an established lender. In addition, if the business is successful, these friends and family will enjoy the return on their investment. On the other hand, there is a risk of alienating the very people you are closest with if you are unable to pay the money back.

    Bank Loan

    • Business banks are a good source for start-up financing, as they are experts in small business loans. Bank lenders will require a start-up business to write a business plan with detailed financial statements before approving a loan. This gives both the bank and the entrepreneur the chance to evaluate the profit potential of the business. A start-up owner may be required to put up her personal assets, such as a house or car, to guarantee the loan.

    Venture Capital

    • Venture capital firms look to invest in early-stage businesses that have high potential for growth. These firms are run by professional investors who will provide financing in exchange for part ownership of a business. A benefit of this financing is that some venture capital firms may also offer management advice and bring in an expert management team.This type of financing is most appropriate for start-ups that plan to someday be acquired by another company or to go public and sell shares of stock. This option is not appropriate for start-ups that have plans to stay small or privately held in the future, as the venture capitalists will not see the potential return on their investment.

    Grants

    • There are some grants available for start-up businesses, both from the federal and state governments. These grants require a lengthy application that can takes hundreds of hours of work and, if you are awarded the grant, the post-award reporting can be very arduous. Still, because you do not have to pay back the grant, this is an attractive option for many start-ups. The Small Business Administration (see References) has information on these types of federal grants. Your state’s Department of Commerce is a good resource for state grants.

    Risk

    • When choosing a method of financing for your start-up, you will have to consider a few important risks. Getting a loan from friends and family may put your closest personal relationships in jeopardy if you cannot pay them back. If you default on a bank loan, you may lose your house, car and other assets. Getting financing from a venture capitalist means giving up considerable control of your business. Finally, putting in hundreds of hours of work into a grant application does not guarantee funding, but will use up your time and resources. By understanding how you feel about these risks, you will be able to choose the right method of financing for your start-up.

Read more: Start-Up Financing | eHow.com http://www.ehow.com/about_7939843_startup-financing.html#ixzz1Z1levfhc

 

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