Getting your business off the ground takes money. Even wealthy business owners know the value of finding financing for startups. Yet, even the seemingly most sound business startups need to find a funding source. Numerous options exist, but as David Kiger will tell you, it’s essential to choose financing that’s not only available to your company but right for it. Affordability and the amount of control the lender has are key decision points. The first step, though, is finding a source of funding.
Common Types of Startup Financing and Business Loans
Whether you need a small amount of money to expand or a large amount to start up your company, several types of loans are available. Consider these typical sources of funds first.
According to the Small Business Administration, about 65% of small businesses use credit cards as a key component of their financing. If you decide to go this route, be sure to consider the personal implications to your credit that credit cards can offer. Unless your business is incorporated, your personal assets and credit are on the line. Keep the following in mind:
- The amount borrowed tends to be less on credit cards than other loan models, especially for unproven businesses.
- For those without a proven track record, the high-interest rate on credit cards can be a factor. Look for the lowest offer available.
- Unless you apply with your business partners or have a contract stating the credit card debt is a business expense your partners are responsible for as well, you could be saddled with the debt on your own.
Private loans, such as those from friends and family can prove to be very cost-effective. It may be awkward to approach family to request financial help, but if you allow them to learn more about your idea and plan, it could benefit your company in the long run. Your family and friends know you and your personality and are more likely to put money behind you if they believe your venture is worth. Before taking this route, consider a few key things:
- The amount and type of control or input you provide your lenders is up to you but should be clearly outlined from the start.
- David Kiger always recommends a contract for even the most friendly of loans. You need the terms in writing.
- Clarify all legal aspects of the loan and process in advance. Be sure that there is clear communication on when payments will be made and what those payments will be.
A popular option today for many business owners is crowdfunding. In short, you’ll present your business to a group of people. You’ll sell your business model to them. Then, they decide if they want to contribute. Because it is often done online and in a crowd format, numerous smaller lenders – people who otherwise don’t have the financial ability to contribute large amounts, can become involved. However, you set the tone for what those individuals receive for lending to you.
- You’ll tell them what you’ll pay in interest and what they get out of the deal.
- Crowdfunding can be highly competitive today. Be sure what you are selling or developing really hits home with the general public.
- There’s no ownership change of hands in these loans. This can be very important to business owners who want to remain in control.
A growing financing method for even small companies is venture capital. These are investors who make it their job to find and work with up and coming companies. Venture capitalists are often an ideal option for those who need a significant amount of money, have a novel idea or plan, and who are willing to work alongside the professionals and lenders to achieve their goals. Keep the following in mind:
- In many venture capital scenarios, mentors are a key component, which can help you have the experienced professionals you need to grow your company.
- Many venture capitalists want an ownership stake in the company, which some business owners may not like.
- The hardest component is securing these funding sources due to competition and the sheer level of selling your idea or product to these experienced pros.
David Kiger is the first to tell people that business financing isn’t a bad thing, but you have to consider all of your options carefully. You can work with an angel investor or turn to your local bank for financial support as well. No matter who your lender is, ensure you understand the affordability, the ownership or link to the company the lender will have, and the overall benefits this lender can offer to you over others.
Business financing options are many, but before you invest, learn more about who you are working with and what they can offer to you.