Use Your Own Funds
Using your own funds is the best source of financing for anyone who wants to start a business. Cash is immediately available, there’s no interest to pay, and you don’t have to offer anyone else equity in the business. However, your needs may well be beyond your cash reserves. In this case, you’ll need to turn to other avenues in order to get the necessary capital.
Banks
The bank you already use is a logical place to go to raise capital. There are many different types of loans which may suit your needs. Bear in mind, though, that banks tend to be conservative, and will need some sort of collateral as security for your loan.
Finance Companies
These are geared more towards active investors and will loan money for more risky ventures than a bank will. They also charge higher interest rates. Finance companies will be interested in your collateral, your track record and the potential of your new business.
Equity Financing
Sometimes, raising start-up capital requires giving up a portion of your business to private investors. This is called equity financing, and involves dividing your business ownership among investors who contribute capital, but who may or may not participate in the operation of the business itself. There are no loans associated with equity financing, and there’s no legal obligation on you to pay back the amount invested. All the investor gets for his or her money is a percentage of the business, and the losses and profits associated with it. This may seem ideal, but remember that you are giving up a portion of your business and, with it, some control. Negotiate the best possible package for yourself.
Venture Capital
This is another option open to new business owners, however it can be a very difficult and potentially detrimental avenue to take. Venture capitalists like to invest in new businesses that have the potential for relatively high profit and growth. They will often consider more high-risk ventures than banks or finance companies, but they must go into each deal with the possibility of returning five to ten times their investment in three to five years. This may mean that they own anywhere from 20 to 70 percent of your company. Other options open to you include:
Life Assurance Policies – it may be possible to get a loan of up to 95 percent of your policy’s cash value.
Credit cards – although interest rates are high, it is a quick way to get several thousand dollars.
Using suppliers – try to build up credit facilities with your suppliers as quickly as possible.
Friends and relatives – make sure you have legal loan documents drawn up.
