Establishing a new business can cost hundreds of thousands or even millions of dollars—money that not a lot of individuals have to invest on their own. Because of this high barrier to entry, it’s essential that you know the three types of financing options for your start-up business. Each one of these can offer a road to funding your initial operation costs, easing the stress of establishing a new company and ensuring you start off with solid footing.
The angel financing method refers to the assistance of a private individual with a lot of capital to offer. This high-net-worth person offers their money to provide the funds necessary to get your company off the ground, covering the initial costs of employment, the building lease, equipment, and more. In exchange for their financing, the financier will take equity in your company.
Angel financing is a viable way to seek funds, but it can come at the cost of higher return rates to the individual funding your project. You eliminate the hassle of dealing with banks and other lenders, but turning a profit may initially prove difficult.
Venture capital (VC) firms are popular sources for new business start-up funding. These firms provide the business-owner with funds and strategy assistance and introduce potential clients and business partners. It’s a reliable way of networking in your industry on top of securing financial backing.
VC firms are great sources of industry knowledge and capital, but securing the resources necessary can be difficult. Lenders are generally cautious with their investments, typically funding businesses that can offer high profit margins as well as present business models with proven success. You’ll need a strong business pitch to impress the lenders and engender a mutual trust.
Small Business Administration Loans
These loans, given by the Small Business Administration (SBA) and backed by individual banks, present business-owners with safe and reliable ways of finding monetary support. Several different programs are included in SBA loans, each one with different benefits and purposes.
Usually, SBA loans are only given to businesses that exhaust all the other financing options. If reasonable options are still open to you, the SBA may reject your request for funding. Besides that, you must also know what program you need before applying; ignorance of what you need can complicate the process and slow progress to a halt.
The Foundation of Success
You need to know what you’re getting with your options for financing your business. Some lenders may offer longer terms, while others might provide higher interest rates. Don’t sign a contract you don’t understand or accept something that can siphon more money than you’d make. You may need funding, but you shouldn’t sabotage your success to obtain it.