While starting your own business can be a daunting endeavor, there are several sources of capital to be explored by potential entrepreneurs. Capital may be referred to as the money being invested in a startup business by third parties, who would then turn a profit should the business in question become a success.
Since businesses require numerous resources to operate successfully, financial backing is integral during the first initial stages. Before an entrepreneur can solicit capital from others, it is important to create a presentation that maps out how the business operates, so the financial backers understand how their investments will be used. It is only by gaining the trust of potential investors that entrepreneurs can receive proper funding for their proposed business ventures.
Where Does Capital Come From?
There are several potential sources of startup capital for one’s own business. Depending on the type of business, each source has its own advantages and disadvantages.
Friends and Family
One of the more obvious sources of capital for a new business would be the people you know best: friends and family. While asking family members or friends to invest in what may become a successful business venture, there is also the possibility that the business may end in failure. This can lead to strained relationships between those who are closest to you. Because of the uncertainty of starting a business, seeking investments from people only in your business network may be a more practical option than seeking money from friends and family.
Crowdfunding is the process of presenting your business idea to the general public as a means of winning over potential investors. This strategy has become an increasingly popular avenue of gaining financial backing for new startups and other types of projects. While the crowdfunding method can be met with great success, it is not without its risks. Unlike friends, family, or business colleagues, crowdfunding mainly relies on investments from strangers, which can have its disadvantages.
There are currently over 500 websites dedicated to crowdfunding campaigns, each of which demands a certain percentage of profits should your business become a success. In addition to possibly owing a certain amount of money to these websites, crowdfunding also makes your startup ideas—and your venture’s success or failure— more visible to the general public. If your crowdfunding campaign fails to meet its financial goals, possible investors can use that as a reason to not invest in your future projects.
Publicizing your project through crowdfunding can also lead to the theft of your idea. On the other hand, crowdfunding campaigns can open the door to receiving valuable feedback from others, which can help the success of your business.
Angel investors (also known as informal investors, seed investors, private investors, angel funders, or business angels) may be friends, family, business colleagues, or other individuals who are looking to fund your project. Unlike other investors, angel investors are more committed to the practical success of your startup, and will actively assist in getting your business off the ground and running.
Angel investors differ from other providers of capital in that they typically believe in the idea and in the impact of the project, rather than just benefiting from its profitability. Angel investors may also have a record of investing in several businesses, usually at least six per year. They may be more upfront about whether they believe in your business, since they would view it as both a personal and professional investment. Angel investors must be certified as accredited investors by meeting the standards of the Securities and Exchange Commission (SEC). They must also have an annual income of $200,000, and meet a minimum net worth of $1 million.
A more traditional funding route, bank loans may be the only practical source of capital for some entrepreneurs who wish to start a possible business. It is important to note, however, that bank loans involve a large amount of paperwork and background information. It is important to have a thorough understanding of your contract or agreement before taking out a bank loan, since it often includes key information such as interest rates, financial deadlines, types of fees, and other critical data.
If an entrepreneur is looking to start a small business, an SBA7(a) loan may be a viable option. This is a government program that is only available to entrepreneurs after they have attempted to secure other sources of capital. Applicants must be able to explain the purpose of their business and how it would function. SBA7(a) loans may also be used to purchase or expand an existing business; pay off existing debt; or purchase equipment, furniture, and other business supplies. It is important to note that while an SBA7(a) loan may be a great option for potential small business owners, it is made with a guarantee that the loan will be repaid at a future date.
Sources of Capital: Know the Options
As we have seen, there are many possible sources of capital available to those who wish to start a new business. Each of these sources, however, has its own requirements and nuances, and may impact a new enterprise differently. It is strategically important, therefore, that entrepreneurs fully understand how each type of investment works, and which would be the best option for their particular needs.
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