SOURCES OF FINANCING
Many
entrepreneurs struggle to find the capital to start a new business. There are
many sources to consider, so it is important for an entrepreneur to fully
explore all financing options. He also should apply for funds from a wide
variety of sources.
Personal savings:
Experts agree that the best source of capital for any new business is the
entrepreneur’s own money. It is easy to use, quick to access, has no payback
terms, and requires no transfer of equity (ownership). Also, it demonstrates to
potential investors that the entrepreneur is willing to risk his own funds and
will persevere during hard times.
Friends and family:
These people believe in the entrepreneur, and they are the second easiest
source of funds to access. They do not usually require the paperwork that other
lenders require. However, these funds should be documented and treated like
loans. Neither part ownership nor a decision-making position should be given to
these lenders, unless they have expertise to provide. The main disadvantage of
these funds is that, if the business fails and money goes lost, a valuable
relationship may be jeopardized.
Credit cards: The
entrepreneur’s personal credit cards are an easy source of funds to access,
especially for acquiring business equipment such as photocopiers, personal
computers, and printers. These items can usually be obtained with little or no
money paid up front and with small monthly payments. The main disadvantage is
the high rate of interest charged on credit card balances that are not paid off
in full each month.
Banks: Banks are very conservative
lenders. As successful entrepreneur Phil Holland explains, “Many prospective
business owners are disappointed to learn that banks do not make loans to
start-up businesses unless there are outside assets to pledge against
borrowing.” Many entrepreneurs simply do not have enough assets to get a
secured loan from a lending institution.
However,
if an entrepreneur has money in a bank savings account, she can usually borrow
against that money. If an entrepreneur has good credit, it is also relatively
easy to get a personal loan from a bank. These loans tend to be short-term and
not as large as business loans.
Venture investors:
This is a major source of funding for start-ups that have a strong potential
for growth. However, venture investors insist on retaining part ownership in
new businesses that they fund.
·
Formal institutional venture funds are
usually limited partnerships in which passive limited partners, such as
retirement funds, supply most of the money. These funds have large amounts of
money to invest. However, the process of obtaining venture capital is very
slow. Several books, such as Galante’s Venture Capital & Private Equity
Directory, give detailed information on these funds.
·
Corporate venture funds are large
corporations with funds for investing in new ventures. These often provide
technical and management expertise in addition to large monetary investments.
However, these funds are slow to access compared to other sources of funds.
Also, they often seek to gain control of new businesses.
·
Angel investors tend to be successful
entrepreneurs who have capital that they are willing to risk. They often insist
on being active advisers to businesses they support. Angel funds are quicker to
access than corporate venture funds, and they are more likely to be invested in
a start-up operation. But they may make smaller individual investments and have
fewer contacts in the banking community.
Government programs: Many national and
regional governments offer programs to encourage small- and medium-sized
businesses. In the United States, the Small Business Administration (SBA)
assists small firms by acting as a guarantor of loans made by private
institutions for borrowers who may not otherwise qualify for a commercial loan.
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