Sources of Funding a Business If you are starting your own business or looking to expand, you may be wondering what sources of funding are available. Although traditional bank loans are an option, there are other opportunities available for you to take your business idea from concept to completion. Bank Loans 1. Bank loans are a traditional funding option that can help support your business. Some banks require that you have at least two years of tax statements to prove that your business is sustainable and need collateral for the loan, unless you are purchasing a business. If you do decide to purchase an existing business, then assets of the business may be used to help secure the loan in place of collateral. Angel Investors 2. You can find private or angel investors to contribute financing to your business. The benefit is that you do not have to pay for the loan, and the drawback is that the investors may take a significant amount of equity or ownership in the business. One of the obstacles in this funding method is finding the right angel investor. Many have requirements about what type of business they will fund, the amount of money that can be requested, the state that they will invest in and the length of time for the investment. Before agreeing to a relationship with an angel investor, make sure that you are each aware of expectations and obligations. Seed Money 3. Seed money is usually used for start-up money or even perform market research to determine if a product or service has a need and thereby decide on a potential value. Many beginning business owners may ask friends or family for some seed funding and provide a part in the company until the loan is repaid. Others might use their own funding or request capital through angel investors or venture capitalists. Seed capital is normally in the amount of $10,000 or less. This is often considered a higher-risk business funding option on the part of the investor because he cannot see any existing projects or determine value. Venture Capital 4. Venture capital has become a popular funding source for businesses. Venture capitalists normally require that they get an equity stake in your company in exchange for their investment. Venture capitalists usually focus on certain industries and may want to provide direction in regard to where their financing goes and determine the direction of the company. The majority of venture capital firms focus on areas such as software development, technology, Internet and computer services. Government Grants and Incentives 5. Although the majority of grant funding is for nonprofit organizations, some federal, state and local grant programs are available for small businesses, depending on the area of business. A good place to start is through your state's economic development office, which may provide funding for infrastructure development, new full-time employment opportunities and capital. Some states offer incentives instead of grants to businesses that hire full-time employees, especially if they are low- income or on food stamps. If you are a business focusing on alternative energy, medical research or technology, Grants.gov can provide resources on USDA grants, funding through the National Institutes of Health, and other government programs that may provide funding for your business. Be aware that Grants.gov requires registration of your business before you can start submitting grant applications, which may take a few weeks to be processed. Tips 6. Whether you want to approach a bank or another type of funder for your business, it is important to have a solid business plan, which will lay out current and future services or products you will provide, leadership information and background, financial projections and other important information related to your business idea.
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