The 5 Best Sources of Capital for Your New Business
No matter how terrific your idea or service is, your business won’t get off the ground without adequate funding. Business startup costs can vary, but it’s fairly safe to say that you will always need more capital than you think. Not to mention that knowing that you’ve forged relationships with financial institutions or investors who might come to your aid as your business grows might forego some sleepless nights.
But where do you get your initial capital? In addition to the usual suspects, like friends and family members, there are other funding resources available to business owners. Below are five of the best sources of capital for your business.
1. Angel Investors
- Typically, Angel Investors invest early and therefore expect equity compensation for their investment. This means, in exchange for the capital they want to invest, the business owner will offer them a percentage of the company and revenue. Angel Investors normally have larger amounts of capital to invest; however, trading money for a stake in your business isn’t always an attractive option. Many Angel Investors seek at least a 10% stake in your business, which can easily leave you, the business owner, with very little direct ownership depending on the number of investors. Additionally, when Angel Investors are ready to sell back their percentage in the company, they may look for a larger-than-average buyout that could hurt your revenue stream. That being said, they can sometimes be the best option for those seeking a decent influx of capital without the expectation of paying the money back if the business fails.
2. Bank Loans
- Bank loans are a very common source of funding with many different options that can suit your needs. However, there are drawbacks to bank loans, including the need to generate a consistent cash flow to cover the interest payments. They can also be difficult to secure depending on your previous financial history. Banks will review many factors when evaluating your ability to secure and pay back a loan, including your credit history, cash flow history, projections for your business and the collateral you have available.
3. Government Loans
- There are many sources of funding available to small businesses at the federal and state level.
- SBA 7(a) Loans – These are federally sponsored debt-financing programs and are the most popular option. The high number of banks that offer this loan gives you many options for finding a competitive interest rate, so it’s best to shop around.
- Local and State Economic Development Organizations – These organizations can charge really low interest rates in cooperation with bank loans. These groups may not be able to finance your entire operation, but it may make securing the additional funding you need easier. A very good resource for these types of organizations is your local chamber of commerce.
- Small Business Innovation Research (SBIR) Grants – The application is intense, but an SBIR Grant can be a great way to turn your intellectual property into business capital.
- Depending on your product or service, partnering with a vendor or supplier might give you an injection of capital that you need to start. Also, because the financial relationship is mutually beneficial, you often don’t need to share equity or revenue with your vendors.
- The rise of crowdfunding websites, like Kickstarter, makes it possible for your current and future customers to be part of growth of your business. If your service or product is attractive or unique enough, customers will be eager to be a part of it. In addition to Kickstarter, there is also indiegogo, RocketHub, GoGetFunding and FundRazr. Each of these platforms offer different benefits and fundraising management options, so its important to spend some time on the front end evaluating which one is right for you and your needs.
Generating and managing the capital for your business is key to early and ongoing success. Using one or a combination of these methods will help you fund your endeavors now and in the future.