Financing

finance-graphUnless you have funds specifically set aside to create your business, you will need start-up capital.  This can be achieved either through debt or equity financing.  Debt essentially means that you borrowed the money with interest, whereas equity is when an investor gives you money in return for some ownership of your company.  The start-up capital needs of your business will determine what kind of financing will be used.

Debt financing can be done via three methods: credit cards, bank loans or government funding.  If your business will not require very much start-up capital and it can recover the funds in a few weeks, such as you need to purchase a laptop computer for a consulting business, you may consider using a personal credit card.  Although many start-up sole proprietorships do this with the owners’ personal credit cards, it is not advisable, simply for the fact that credit cards carry large interest rates.  In addition, using credit cards as term debt financing can seriously hurt your credit history and make obtaining future funds more difficult.

More than likely you will take advantage of the other two options, bank loans and government funding.  Before you can attempt to use either of these two funding options, you will need to write a very detailed, well-researched and professional business plan.  Because you will have no prior business history, this is one of the methods that the bank and government will use to evaluate if your business can survive long enough to repay the debt.  You will also need to begin researching banks that specialize in commercial lending to start-ups and government programs.

More information on bank financing.

More information on government funding.

If you choose not to take loans to finance your business, you will need to use equity.  Equity financing can be as simple and small as having a friend front several thousand dollars to be your business partner.  If your business will need more, perhaps millions of dollars in funding, you could consider going to a venture capital firm or approaching angel investors.  As you would if you were going to approach a bank for financing, you will need a detailed business plan.  You will need to know that business plan inside and out because you will present that plan to potential investors, and they will ask you many questions. 

More information on venture capitalists.

More information on angel investors.

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