One of the most difficult questions that many people have they are trying to start a business is finding the start-up funding to do so. In order to understand the available options, it is important to understand the different types of funding as well as the potential benefits and drawbacks of each. Securing funding can be a tricky issue because you will probably need some funding as a minimal start-up capital in order to prove your business concept so that you can secure more substantial and long-term funding.

2 Basic Types of Financing

There are two basic types of financing: equity and debt. Equity financing is when you sell partial ownership of company in exchange for financial backing. The investors will assume a majority of risk in the case that your company fails, however they will make a large return on their investment if it succeeds. Debt financing is when you borrow money and agree to pay it back following a particular time frame, regardless of whether or not your business succeeds. As a general rule, if you have a high equity to debt ratio, then debt financing is probably the best option, and the opposite scenario is true as well.

Financing Options

There are a number of different financing options available and it is important to understand the pros and cons of each of them.

– Friends and Family – It may be surprising how often startups get their initial capital from friends and family. The advantage of this source is that you already who they are and have a general idea of whether or not they will invest. There are several drawbacks a well. First, you will be mixing personal business, which always has the potential to backfire. Second, they will not have the same connections as similar options such as angel or investor firms. Finally, they are not accredited investors, which can be a problem in the long run.

– Consulting – One way of generating start up capital that is often overlooked is starting a consulting project. It allows you to create your product and fine tune it while still generating an income. The biggest advantage to this is that you will have already tested your product by the time that your company gets into full swing. Additionally, because you are already creating some income, there is a very low level of risk. The problem is that with this income already being generated, it is easy to get stuck in the “consultancy-mode”, which has a very small profit margin and can prevent expansion into your primary area of interest.

– Credit Cards – If your small business only needs a short-term cash injection, then using personal or business credit cards are always an option, however if they cannot be paid off quickly, the interest rate can make this a poor choice. The primary benefit is that they are easy to get and can be used for anything.

– Loans – There are a variety of different loans available from places such as banks, private sources, and much more. The benefit of this source is that in order to prepare, you will have to creating a business plan, with projections, which will help you take a closer look at whether or not your business is really a good idea.

– Angel Investors and Venture Capitalists – These two groups are different, however they have many things in common. Primarily, for they provide your business money in exchange for equity in your company.

As you can see there are a number of financing options available, so it is important to choose wisely. Each option is designed to be a good fit in different situations and it is up to you to determine what options are the best for you.

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Category: Business
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