4 Ways to Finance your Startup
The type of financing you need depends on what type of legal structure your new business will have, as well as the capital requirements at different stages of your venture. The most common sources are outlined below. Remember that no matter what entity you choose or where you get your start-up capital, maintain separate and thorough records for your business transactions and keep a separate bank account in the business name.
Personal Savings
Hands-down, the easiest way to finance a business is to use your own money. Make sure to complete appropriate paperwork that recognizes your investment in your company – a separate entity, to protect the rest of your assets.
Friends and Family
People who know you and believe in your vision are a great source of low-interest loans or angel investment. When you borrow from people close to you, it’s tempting to establish terms verbally and vaguely. Always provide a document outlining the investment made, its payback date, and interest payment schedule. If they are providing capital in exchange for ownership, provide timely and accurate reports so they can see how their investment is doing. A simple “business is doing fine” can be a tempting report to give, but respect their investment and provide your financials to them at regular intervals.
Small-Business Bank Loans (Using Personal Assets as Collateral)
Opening a credit line with a bank is a great way to maintain ownership and still get the money you need to finance your start-up. Be warned, though, that banks are only looking for safe investments, and will require impeccable business planning documents and easily saleable collateral to assure them that they will receive repayment on time. You can also contact the SBA (Small Business Association) for help obtaining financing or even to get a loan from them.
Angel Investors/Venture Capital
As a general term an angel investor is any individual who is providing start-up capital to a business in exchange for equity. Venture capital is generally a pool of money by many investors looking for high-risk, high-return investments. Many times, a wealthy family member or local business groups can be a good place to start looking for investors. Typically, a big angel will bring in a team to help run the business to maximize his or her return from their investment, so be prepared to sacrifice some control of your business if you’re able to get this type of angel on board. This investment brings in the team of experts to handle necessary details of the startup in exchange for a percentage of ownership.
In all cases (except using your personal funds), you have to sell yourself as a key to this business. Make your potential investors believe in YOU, and they will find it much easier to believe in your business. Always present a professional, organized, forward-thinking image to your potential investors. This can be done through a professional website and business cards, which shows that you have a vested interest, and have already taken the initiative on the project.
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Tony Kau is co-founder of Portland web design and Internet marketing company Vanivo. For service inquiries, you can contact him directly at tony -at- vanivo.com.
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