Note: This lecture is merely topical in nature. We cover the issue of Business Funding in more depth in our Business Finance Library.
Business funding is a primary concern among nearly every startup venture. Before you can determine your funding options, need to determine how much funds you will need and what your are willing to risk or sell in order to receive those funds.
How much will you need?
This question helps to determine:
- What sources of capital will be interested in funding your business,
- What types of funding you may be eligible for, and
- What will be the best strategies for you to pursue in raising the funds.
Look back to the budgeting section and the financial projections section to begin your calculations. These prior lectures will help you account for:
- Startup costs by breaking them down into fixed assets and working capita,
- Fixed assets, as property that usually has some sort of long-term value, and
- Working capital , which is money that will be used to finance the short-term operations of the business.
What are you willing to put at risk or sell for the business funds?
Generally, early stage business funding (funding from sources other than the revenue produced from business operations) comes in three forms:
- Contributing Personal Assets,
- Incurring Debt (generally personal debt, rather than business debt), and
- Selling business assets (such as ownership equity).
Depending upon your personal assets, risk tolerance, and the nature of your business, any combination of these forms of funding may be available.
- Note: Business must generally have a significant track record of producing revenues before it can obtain loans or effectively incur debt in its own name. Further, businesses are only attractive to outside investors if they have the capacity and goal of rapid growth and a plan for an exit event (cashing out the investors). Early stage sale of equity is generally done through partnering with other individuals, who bring additional assets or funds into the business.
Sources of Business Funding
- Personal Funds
- Savings and Personal Assets
- Personal Loans or Credit Card Debt
- Life Insurance – Equity built up as the cash value of the policy.
- Borrowing Against Retirement Funds
- Home Equity Loans
- Family and Friends
- Personal Loans
- Promissory Notes from the Business
- Small equity Percentage
- Partnering with Others
- Loans from Lending Institutions
- Note: Commercial loans ill require collateral and personal guarantees.
- Loans Underwritten by Government Institution
- Note: Small Business Administration Loans (SBA Loans) are the most common forms of small business loan. These loans require personal guarantees from the borrowers.
- Investment by Partners (Members of Business)
- Note: Partners generally come in two forms: Active and Passive Partners. An active partner will work or be involved with the business operations. A passive partner will generally contribute funds or other assets and take no part in the daily operations.
- Outside Investors
- Angel Investors – Individual equity investors.
- Venture Capitalists – Institutional equity investors.
- Institutional Grants
- Note: These generally include some form of Research or Social Impact grant.