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7 Sources of Funding for Small Business Startups

Mark Smith by Mark Smith
November 15, 2020
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7 Sources of Funding for Small Business Startups
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Funding for Small Business – The main question I get asked as a small business startup coach is, where can I get startup money?

I am always happy when my clients ask me this question. If they ask this question, it’s a sure sign that they are taking severe financial responsibility to get started.

Debt financing is the use of expanding the borrowed money to finance a specific business. Various forms of borrowed money you borrow are considered debt financing.

Sources of debt financing are varied: banks, savings and loans, credit unions, trade finance companies, and the US Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even in the absence of interest.

Loans for debt financing are relatively small and short-lived and are granted based on your repayment guarantee from your assets and equity. Debt financing is often the financial strategy of choice for the startup phase of businesses.

Capital financing is any form of funding equity-based for your business. With this type of funding, the financial institution makes money available in exchange for a portion of your business’s profits. This means that you are selling part of your business to receive money.

Venture capital firms, angel investors, and other professional equity funding firms are familiar sources of equity financing. When handled properly, loans from friends and family could be considered an unprofessional source of equity financing.

Capital financing includes stock options and is generally a more substantial long term investment than debt financing. As a result, equity is more often thought of in the growth phase of companies.

1. You

Business investors are more eager to invest in your startup when they witness that you have put your money at stake. The primary step to look for money when starting a business is your wallet.

Personal property

According to the SBA, 57% of entrepreneurs plunge into personal or family savings to pay for their business launch. If you decide to use your own money, don’t use it all. It will save you from eating kimchi for the rest of your life, give you an excellent money borrowing experience, and increase your business credit.

A Job

There’s no reason why you can’t find an outside job to finance your startup. Most people do. This ensures that there will never be a time when you run out of money and reduce most of the stress and risk associated with starting up.

Credit Cards

If you wish to use plastic, look for the lowest interest rate available.

2. Friends and Relatives

We can also borrow money from friends, and family is the most common retail finance source for small business startups. Here the main benefit is the same as the main drawback: you know these people. Unexpressed needs and attachment to the outcome can create stress that warrants a distraction from this type of financing.

3. Investors

An investor is a person who invests in a commercial venture, providing capital for startup or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make risky investments in new businesses hoping of high rates of return on their money. They are often the first investors in a company and add value through their contacts and expertise. Unlike venture capitalists, angel investors typically don’t pool money in a fund managed by professionals. Instead, angel investors often organize themselves into angel investor networks or angel investor groups to share research and investment in a business.

4. Business Partners

There are two types of partners to consider for your business: quiet and working. A silent partner brings in the capital for part of the company but is usually not involved in running the business. A business partner contributes not only money for a portion of the business, but also with skills and workforce in daily operations.

5. Commercial Loans

When launching a new business, there is a good chance that there is a business bank loan somewhere in your future. However, most business loans go to small companies that already have a good track record. According to a recent SBA survey, banks finance 12% of all small business startups. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral (real estate and equipment). Banks need a formal business plan. They also consider whether you are investing your own money in your startup before making a loan.

6. Seed Financing Company

Start-up finance companies, also known as incubators, are designed to encourage entrepreneurship and cultivate business ideas or new technologies to attract venture capitalists. An incubator typically provides physical space and some of these services: conference rooms, office space, equipment, services, research libraries, legal services, secretarial services, accounting, and technical services. Incubators provide a mix of advice, services, and support to help new businesses develop.

7. Venture Capital Funds

Venture capital is a form of private equity financing typically provided to new, growing businesses by professional external investors, backed by institutions. Venture capital firms are real corporations. However, they invest others’ money and much more significant amounts (several million dollars) than seed financing companies. This type of capital investment is usually best suited for high-growth companies requiring many capitals or startup companies with a healthy business plan.

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Mark Smith

Mark Smith

Mark Smith is an established technical expert with 5+ years of background in Web Development and Digital Marketing. His passion for helping people in all aspects of online marketing flows through in the expert industry coverage he provides.

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