Once you determine the amount of start-up financing you need, create a list of funding sources and start knocking on doors. Business capital can be raised by bringing aboard business partners or equity investors, securing business and personal loans and lines of credit, or tapping into personal finances. When raising business capital, be prepared to provide potential business investors with a solid written business plan, a strong 15-minute presentation of the business idea, realistic financial projections, and assets and guarantees that may be available if security is required.
Apply for a traditional bank loan from a local bank. A start-up business with no financial history should be prepared to discuss the business plan and financial projections in detail, explaining all market assumptions, and offer security in the form of a guarantee or security interest in an asset. The guarantee can be a personal guarantee from the business owner or SBA (Small Business Administration) guaranteed loan programs. The former can include a guarantee of up to 80 percent of the principle loan amount. For a business with low start-up costs, a micro-loan may be the answer to financing the new business venture.
Find a business partner with the financial resources to contribute a substantial amount of the business start-up costs. In addition to being a source of income, obtaining a business partner allows for sharing business risk. However, an entrepreneur must also share business decision-making power and profits, so choose a business partner carefully.
Obtain a loan from a venture capitalist (VC). The cost of financing a VC investment will likely be more costly than securing a conventional loan. Business equity will be sacrificed to the VC, whether a private or an institutional investor. Unlike a business partner, a VC will not take part in daily business decision-making.
Solicit public funding through a direct public offering. Offering shares in the company provide start-up capital, but it also creates shareholder accountability. However, being among the first equity investors can be a selling point in raising capital for the business enterprise.
Finance the company with personal assets, which can include personal savings or the business owners 401(k) retirement account. Remember that there may be tax considerations when tapping into a 401(k) plan. The business owner may also consider liquidating other personal assets to fund the business venture. The positive side to personally financing a business is that it avoids interest to others, allowing the entrepreneur to benefit from all of the business profits.
Apply for a business grant. Depending on the type of start-up entity, a business grant may be available from the state or federal government. Business grants are often available to business sectors that the government seeks to encourage, such as those entering certain segments of the agricultural industry.
Tips & Warnings
Follow up on all business finance leads, which includes sending professional thank you correspondence to people you approached about financing.
Have professional business cards, letterhead, and envelopes printed for business networking and correspondence.
Remember that a personal guarantee means that if the business fails to repay the loan, the owner is personally liable for the loan amount.