Personal savings are a great source of start-up financing for small businesses. You can also contribute money from your 401(k) if you have one. Depending on the nature of your business, this can be as little as a laptop and a website, or as much as a brick-and-mortar bakery. However, if you are looking for an outside source of startup capital, you will need more cash.
Another alternative to traditional start-up financing is government grants. Although banks prefer to fund firms with strong financials, a start-up may need to find a strategic partner to provide the funds and share the risk. Such a partner could be in the same industry as yours, or related to your own. In either case, they may want to gain distribution rights or exclusive access to your product. These partnerships can be obtained through private placement, a process that allows you to raise funds without filing with the Securities and Exchange Commission.
Friends and family can also provide startup funding. Some family members may lend out the company’s stock, while others might provide an outright loan. Other sources of start-up funding include personal loans, stocks and bonds, or second mortgages. Although these sources of funding are less common, they can be extremely valuable in the early days of a business’s development. You should also consider the risk associated with each of these options.
In addition to the traditional sources of start-up financing, crowdfunding and initial coin offerings (ICOs) offer a disintermediated option. While crowd equity investors have less control and post-financing information, VC funds have more rights and have greater transparency about their portfolio companies. In addition, crowd equity investors may have less legal rights than VC funds. This is why they are a great option for young companies.
While bank funding is a great option for small businesses, many entrepreneurs choose to use their own personal savings to finance their new ventures. These sources are the cheapest and easiest to access, and often require very specific information. Personal funds can also be used to purchase businesses or expand existing ones. In general, the most common sources of small business funding are personal savings and home equity. If these aren’t the best options for your new business, you can apply for government funding for your small business.
Venture capitalists invest their money in companies with the potential for rapid growth. In return, these investors often require ownership in the company. They typically expect to receive a healthy return on their investment, especially if the business becomes profitable and sells its shares to the public. However, venture capitalists are not for every entrepreneur. It is important to find experienced investors who understand the nuances of start-up financing. When looking for venture capitalists, remember to keep these factors in mind.