This is a basic list of sources of capital that most entrepreneurs use while raising capital for their business.
1. Family and friends
Family and friends can be a great source of financing for the first time entrepreneur. If you have wealthy friends and family who can spare some money for you then they can be a great source of financing because your family and friends can provide for flexible terms and conditions.
However, lot of experts warn against taking money from family and friends. Although family and friends can provide you with flexible terms and conditions, they can cause you lot of grief and emotional pain if your business goes sour.
2. Angel investors
An angel investor is an individual who invests in start up businesses. This is usually a former entrepreneur who believes in the entrepreneurial spirit. Angel investors are usually a bit more flexible with their terms.
Sometimes angels pool in their funds together and invest in groups. When you are starting off, and if your investment needs are not very high, angels can be a great source.
3. Venture capitalists
Venture capitalists are institutions that invest in businesses for a share in the company. Venture capitalists are like angels but venture capitals are bigger more institutional funds.
4. Bank loans
If you are a start up business with absolutely no history, then the traditional bank loans may not be available to you right away. But a bank may give you a personal loan depending on your credit history.
In the US, there are also SBA backed loans. These are loans that are backed by the small business association. The SBA also provides mentoring and other help to entrepreneurs. You may check out the SBA website for more details.
5. Credit cards
Several entrepreneurs have started businesses with credit cards, if you have a high credit line or your business requires only a small amount of money. Then, credit cards can be an option. I would strongly recommend NOT going this route.
The very reason is that credit cards have very high interest rates and once you get in that hole, it’s pretty tough to get out of it.
6. Business line of credit
A line of credit is nothing but it allows you to access more funds than is available in your bank account. If your bank account is $ 10,000 and your line of credit is $ 15,000 then you can withdraw $ 25,000 from your bank account. Sometimes, it is also called overdraft account.
The additional $ 15,000 that is withdrawn from your account will show as negative $ 15,000 in your account. This is not free money. It has to be paid back to the bank. So, be careful.
Several banks provide a line of credit if you set up a bank account with them. Before opening a bank account with a bank, ask them if they provide a line of credit. Get a business line of credit even before you need it.
This is again high risk and sometimes a business line of credit can have very high interest rates. So, watch out and be very careful.
7. Savings and Investment
Sometimes people start businesses with personal savings and even their pension funds. If you have been an employee and have been planning and saving money for a period of time. This is great. Be careful about using your personal savings because it is very easy to loose a lot of money in business very fast.
8. Government grants
In some countries governments give grants to start businesses. This may not be an option for you if you are a “for profit” business.
An option could be to set yourself up as a non-profit and pay yourself a salary. You can visit the US government website for more details http://www.business.gov/finance/financing/grants/
9. Customer financing
If you have already been in business and share a loyal customer following then your customers are a great option. Some musicians and film makers are going to their fans for financing.
Australian musician Clint Crighton has set up a method to raise money from his fans. For 100 Australian dollars, he gives his fans special privileges, a lifetime free entrance pass to his live gigs and a few more perks like a trip to Los Angeles for the recording of his album.
I have read about a few British teenagers who raised more than $ 100,000 just by selling closing credits to their film.
I have also heard of another business that raised money from their customers through the internet. The idea here is to have several people invest small amounts of money that add up to a lot of money. If you have 1000 people invest $ 100 each, you end up with $ 100,000. I think hundred thousand dollars is a lot of money for most businesses.
These are just some of the options available. Make your own list and go out there and pitch your business proposition.
Vinil Ramdev is an entrepreneur, business coach and author of the ebook “How to write a business plan for astonishing results? In just 3 days!” He is also founder of StartupGrowthExpert.com
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