Here are two sources of business financing that you may want to consider when starting your business:
Start-up financing is generally the most difficult to acquire. Why? A business that is just starting up is an unknown quantity. You have to sell your idea and potential for profit to the prospective financiers. The type of business and size are major factors in how and where you seek financing. For example if you are planning to start a computer-based business, a few thousand dollars may be all you need to get started. You may tap your personal savings, a personal loan or even your credit card. However, if you plan a start a capital-intensive business such as a machine shop, you will need at least $500,000 to several million just for the equipment. A high-tech business such as producing computer hardware will require hundreds of millions of start-up money.
More on Start-up Financing?
Private lenders come in many sizes and variations. These range from a personal loan from a family member to a large multi-stage infusion of capital by venture capital institutions. If you have a weak credit history or limited start-up capital a private lender may be your best alternative to get the business financing that you need.
A private lender may offer debt financing, where you will sign a promissory note and repay the loan as specified by the agreed upon terms between you and the lending parties.
If you are seeking a large amount of capital ($500,000 – 100 million), you may have to work with a venture capitalist. This is a form of equity financing. This means that the investors will own a percentage of your company.
A Venture capital firm usually consists of professional financial managers who control the investments of large pools of capital for insurance companies, pension funds, corporate funds and private investors. Each venture firm has specific types of businesses that they are willing to invest in. You must find the venture capitalist that fits your business. Also, you have to approach these people with a serious and well thought out plan. A professional well written and well thought out business plan is a must.
You must also have an exit strategy. Venture capitalist want to know going in to a transaction how they will get their money back and when. Venture capital primary goal is to “take your company public”. That is to get it to a point of growth and revenue where your company will become a publicly traded company and raise revenue through the sale of stock to the public. Some of the money raised can be used to repay the Venture Capitalists.
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