Do You Have a Rich Uncle?
The one thing which stops most people from starting a business is a lack of capital. They have no idea where to get money for business ventures. Imagine what you could accomplish if you could just get enough cash for your business to get off the ground.
Most folks are not as lucky as Donald Trump. His father bankrolled his entry into the real estate business. A one million dollar loan and contacts helped secure additional loans from New York banks and his daughter and sons were born rich. I am not saying they do not work hard. I am sure they do.
However, they definitely had an advantage the rest of us do not have. So what do we do? I am going to explain the traditional ways entrepreneurs go about financing a new venture and then I will conclude with an example of how a person with as little as $500 to $1000 can start their own 6 figure business from home.
How to Finance a Startup Business?
There are two ways of financing a new startup venture. The first is borrowing capital which simply means borrowing cash. The second is raising capital through investments. The method chosen will depend on type, size, and kind of business. Let’s take a look at some informal and formal ways we can get funding.
Borrowing Informal Funding
Family & Friends
Family, friends, and relatives is a common source of funding. The advantage is you can receive monies for free or at a very low-interest rate. The disadvantage is it can sometimes create a wedge between the people involved. This happens more often than you would think because of financial difficulties.
This is you. Maybe you are in a position to finance yourself. The advantage here is you can maintain control of your business as long as you are the majority investor. The downside is it may be expensive to finance with high interest which could lead to financial penalties and eventually a credit downgrade.
Borrowing Formal Funding
Entrepreneurs typically visit banks to borrow money. There are two kinds of loans available unsecured or secured. The first is determined by your creditworthiness. Often this involves a credit card or a credit line. The limit is established based on your past credit history. The secured loan requires assets as collateral, usually a house.
The plus side is the banks have no interest in your business and how it is operated. They only want to collect the interest charges. It is important to shop around or get advice before committing. For instance, the government in conjunction with banks have schemes which support new ventures and could be of benefit.
A new venture could also look to sell equity in their venture. Equity is selling shares. The way this works is the founder will create a limited company and sell shares to other interested parties. They may be individuals or even firms.
Finding Business Investors For Startups
We have already spoken about banks as being one source to find appropriate funds as well as selling shares to receive appropriate funding for your venture. However, there are other places or people you can turn to for funds.
These people are very wealthy individuals who want to invest in companies for a share of the business. They can also provide experience, skills, and contacts. It is important that you maintain a good business relationship with the Angels. The disadvantage is they only invest in specific industries so it may be difficult to find the right one. They invest small or large sums of money.
” Think of Dragon’s Den (Canada) or Shark’s Tank (America) “
These folks deal with much larger amounts of equity compared to business angels. They will want a minimum 20% stake in your company and eventually, they will want to make their money back (and more) by leaving. A more modern twist on venture capitalists is crowdfunding also know as kickstarting.
Crowdfunding is a collection of individuals, clubs or organizations over the internet that collects small amounts of money which together can equal a very large share for the company. One such example is a charity I belong to named Kiva. They collect small amounts of money from people and then distribute the funds to small business owners in developing countries around the world.
Which Method of Finance Should I Choose?
There is no right or wrong answer to this question. It will depend upon the kind, size, and stage of your business. A true startup may only need “seed money”. In this case, it may be okay to receive cash from family and friends. On the other hand, if you are looking for growth funding it may be more sensible to sell shares.
In addition, it is not always “just about the money”. At some stage, you will require expertise, knowledge, and contacts to expand your business. Taking the “trade finance” route – that is selling shares to a person who is in the same industry is smart. They have already been there and built a successful company. Their knowledge, expertise, connections, and capital will be invaluable.
Why Not Start a Business With Little Money and Low Risk?
My problem was I could never come up with the money to start a business. I wasn’t comfortable reaching out to family and friends. I guess I lacked the confidence to succeed which is a problem to discuss another time. The banks would not make loans to me as I was very young with no collateral.
I didn’t know any business angels and venture capitalists wouldn’t touch me with a ten-foot pole. I did have a credit card and I started researching on the net. There are plenty of opportunities to build a real, sustainable business online with very little capital. Yes, there are gurus that charge thousands of dollars but they are the ones you want to avoid.
You can build a business for as little as $300 to $400 dollars a year. I know because I am doing it. My business will eventually provide me with a five or six-figure monthly income. It is like any other offline business which takes time, persistence and effort. It is also important to seek out others with knowledge, expertise, and contacts.
” The difference is it is much, much easier to get the startup money. “
I used a credit card. You could use one too or maybe you have the money already saved or your friends or family may lend it to you as it is not such a large amount. And if you are really strapped for cash you could read my article on the UserTesting System which will cover the $300 to $400 per year.
I belong to a vibrant online community which is teaching thousands of members how to build authority websites to promote affiliate products related to their sites. You can learn more about it by reading my review Wealthy Affiliate – A Gold Mine of Information.
How Do You Finance Your Company?
Do you have experience with companies? How about start-ups? Are you a business angel? Venture capitalist? How about banking? Do you lend money to business people? Please share your knowledge and expertise with us below. Of course, if anyone has any questions we would be more than happy to answer them for you.