Start-up businesses often have a difficult time finding sources of start-up business financing for their initial financing needs. It is often not possible to get bank loans because financial institutions aren’t interested in unproven businesses. Even with the best possible business plan, in the world of business and finance, you may not be able to convince a financial institution to loan any of their often-scarce money available for credit for start-up financing to a brand new business.
There is money available for those who are starting a business. You just have to know where to look and think strategically and creatively. Here are a number of sources of finance a start-up may go for. It is usually a good idea to try to use a combination of two, or even three, of these sources to get the start-up financing that you need for your new business.
When borrowing, you invest some of your own money, either in the form of cash or collateral on your assets. This proves to your banker that you have a long-term commitment to your project.
This is money loaned by a spouse, parents, family or friends. A banker considers this as “patient capital“, which is money that will be repaid later as your business profits increase.
When borrowing love money, you should be aware that:
- Family and friends rarely have much capital.
- They may want to have equity in your business; be sure you don’t give this away.
- A business relationship with family or friends should never be taken lightly.
Venture capital is financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. For startups without access to capital markets, venture capital is an essential source of money. Risk is typically high for investors, but the downside for the startup is that these venture capitalists usually get a say in company decisions.
Venture capitalists take an equity position in the company to help it carry out a promising but higher risk project. This involves giving up some ownership or equity in your business to an external party. Venture capitalists also expect a healthy return on their investment, often generated when the business starts selling shares to the public. Be sure to look for investors who bring relevant experience and knowledge to your business.
Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business while institutional venture capitalists prefer larger investments.
In turn for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency. Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.
Business incubators, or “accelerators”, generally focus on the high-tech sector by providing support for new businesses in various stages of development. However, there are also local economic development incubators, which are focused on areas such as job creation, revitalization and hosting and sharing services.
Commonly, incubators will invite future businesses and other fledgling companies to share their premises, as well as their administrative, logistical, and technical resources. For example, an incubator might share the use of its laboratories so that a new business can develop and test its products more cheaply before beginning production.
Generally, the incubation phase can last up to 2 years. Once the product is ready, the business usually leaves the incubator’s premises to enter its industrial production phase and is on its own.
Businesses that receive this kind of support often operate within state-of-the-art sectors such as biotechnology, information technology, multimedia, or industrial technology. Businesses that were supported by an incubator have a better success rate over 5 years.
Grants and subsidies
Technically, a grant is a sum of money conditionally given to your business that you don’t have to repay. However, you’re bound legally to use it under the terms of the grant, or otherwise you may be asked to repay it. As well, once you are granted money from one government source, it is not uncommon to receive further funding from the source if you meet program requirements.