I'm always glad when my clients ask me this question. If they are asking this question, it is a sure sign that they are serious about taking financial responsibility for start it.
Not All Money Is the Same
There are two types of start-up financing: debt and equity. Consider what type is right for you.
Debt Financing is the use of borrowed money to finance a business. Any money you borrow is considered debt financing.
Sources of debt financing loans are many and varied: banks, savings and loans, credit unions, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even when there is no interest attached.
Debt financing loans are relatively small and short in term and are awarded based on your guarantee of repayment from your personal assets and equity. Debt financing is often the financial strategy of choice for the start-up stage of businesses.
Equity financing is any form of financing that is based on the equity of your business. In this type of financing, the financial institution provides money in return for a share of your business's profits. This essentially means that you will be selling a portion of your company in order to receive funds.
Venture capitalist firms, business angels, and other professional equity funding firms are the standard sources for equity financing. Handled correctly, loans from friends and family could be considered a source of non-professional equity funding.
Equity financing involves stock options, and is usually a larger, longer-term investment than debt financing. Because of this, equity financing is more often considered in the growth stage of businesses.
7 Main Sources of Funding for Small Business Start-ups
1. You
Investors are more willing to invest in your start-up when they see that you have put your own money on the line. So the first place to look for money when starting up a business is your own pocket.
Personal Assets
According to the SBA, 57% of entrepreneurs dip into personal or family savings to pay for their company's launch. If you decide to use your own money, don't use it all. This will protect you from eating Ramen noodles for the rest of your life, give you great experience in borrowing money, and build your business credit.
A Job
There's no reason why you can't get an outside job to fund your start-up. In fact, most people do. This will ensure that there will never be a time when you are without money coming in and will help take most of the stress and risk out of starting up.
Credit Cards
If you are going to use plastic, shop around for the lowest interest rate available.
2. Friends and Family
Money from friends and family is the most common source of non-professional funding for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: You know these people. Unspoken needs and attachments to outcome may cause stress that would warrant steering away from this type of funding.
3. Angel Investors
An angel investor is someone who invests in a business venture, providing capital for start-up or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies for the hope of high rates of return on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Rather, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.
4. Business Partners
There are two kinds of partners to consider for your business: silent and working. A silent partner is someone who contributes capital for a portion of the business, yet is generally not involved in the operation of the business. A working partner is someone who contributes not only capital for a portion of the business but also skills and labor in day-to-day operations.
5. Commercial Loans
If you are launching a new business, chances are good that there will be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that are already showing a profitable track record. Banks finance 12% of all small business start-ups, according to a recent SBA study. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral (real estate and equipment). Banks require a formal business plan. They also take into consideration whether you are investing your own money in your start-up before giving you a loan.
6. Seed Funding Firms
Seed funding firms, also called incubators, are designed to encourage entrepreneurship and nurture business ideas or new technologies to help them become attractive to venture capitalists. An incubator typically provides physical space and some or all of these services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a mix of advice, service and support to help new businesses develop and grow.
7. Venture Capital Funds
Venture capital is a type of private equity funding typically provided to new growth businesses by professional, institutionally backed outside investors. Venture capitalist firms are actual companies. However, they invest other people's money and much larger amounts of it (several million dollars) than seed funding firms. This type of equity investment usually is best suited for rapidly growing companies that require a lot of capital or start-up companies with a strong business plan.
Starting a new venture or trying to realise an ambition of a life time is very exciting and spiritually uplifting experience. But, make no mistake this is one journey where you will uncover shocking surprises if you decide to travel on this journey. However, it is not all doom and gloom you can adopt some simple strategies to minimise your risk. Below is a list of potential pitfalls and how they can be side-stepped:-
1)Start with the market and not the product.
Find out what people want in the market place and then sell them exactly what they want. In other words, conduct a survey and see if there is any demand for your chosen product before developing the product. Some people advocate finding out what people are buying by visiting internet and examining products that are being searched for. There is merit in this strategy but it is only relevant if your market is world wide otherwise the internet data will distort your analytical results.
2)Controlling your marketing spend.
Marketing is the key to creating awareness and thereby market penetration. However, it is quite easy to spend all of your marketing budget and not generate any sales. Test the water with your advertising campaigns. Run a few advertisements and check to see if they generate any sales.
Write your advertisement yourself and talk about all aspect of your business or service and service delivery. Make an offer that customers will find irresistible, give them an incentive to test your product or service, back your offer with a no quibble money back guarantee.
3)Don't wear too many hates yourself.
It is very easy to think that you have to do everything yourself. There are two possible consequences of an attitude whereby you think that you can do everything yourself; you prevent your business from developing simply because you are doing too much and more importantly you will lose focus and sight of where you want to go.
4)Set a sensible pricing structure for your products and services.
Set your prices that are competitive as well as profitable. New entrants in the small business sector tend to undercut their competitors and by so doing don't make any profit. Consider this scenario; wedding quote for 100 people, lunch and evening buffet, silver service, champagne and wine with bride and groom's own labels on them. It is easy to quote a price of $50 per head because that sounds within the ball park. However, upon working out all the costs we came back with a per head price of $70 per head. Moral of this story being that working out prices before preparing quotation is a good idea and we advise people to conduct this exercise every time.
5)Use technology to create awareness.
Internet is the best vehicle to tell your potential and actual customers about you, your products and your service. However, you need to line up what you do with the way you present your information on your internet site. Make sure that you design your internet site yourself and by that I mean replicating what you do and how you do it pretty much exactly how you do it. Otherwise, you may harm your business because you may not get noticed.
6)Set goals; both end goal and the intermediate ones.
You need to decide where you want to be in two years? time. By setting that target goal, you will then set a road map for your business to go for. The road map will consist of intermediate goals along the way which you can use as testing tools to gauge your progress and fine tune your strategy as and when the need arises.
7)Take action.
According to the motivational GURU Anthony Robinson you've got to take action. Take massive action he says. Having a good and well researched idea is not enough, you have to implement that idea otherwise all the effort to date amounts to very little. Just do it.
Finally, about 90% of the business success can be attributed to good management team, well researched market, a good and feature rich quality product as well as good financial backing to say the least. The remaining 10% of the business success is to do with luck, risk taking and even being in the right place at the right time. Be thorough in your research, understand your market and your product, follow the above 7 steps and you will have avoided the dreaded pitfalls.
Both Susan L Reid & Nazir Hussain are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Susan L Reid has sinced written about articles on various topics from Entrepreneurship, Finances and Hillary Clinton Rodham. provides clients with intuitive small business solutions, fresh start perspectives, and powerful attraction marketing tools to successfully sta. Susan L Reid's top article generates over 74000 views. to your Favourites.
Nazir Hussain has sinced written about articles on various topics from Debts Loans, Investments and Debts Loans. Nazir advocates home business because of low start up costs and therefore low risk. For more information, visit at. Nazir Hussain's top article generates over 550000 views. to your Favourites.