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How to Fund Your Start-Up Business

May 23 2011

More Than A Meal

Image by kmakice via Flickr

Have you got a great idea for a start-up, but are wondering how to get it off the ground? You’re not alone - this is a problem that many (if not most) businesses will have to face eventually, either to temporarily patch up cashflow issues or to accelerate growth. Funding a start-up with no financials can be a little tricky (especially now) but it’s still possible – here are some options:

Use Your Own Money

How it works – Dip into your savings, sell anything not nailed to the floor, be super frugal and pay the business first (and yourself last).

Pros – Using your own money is great if you have a relatively inexpensive business model – maybe you’re in freelance web design, or you’re a local plumber with a van. The business is 100% yours and you owe nobody a cent, which is a pretty good feeling.

Cons – Anything more than a 1-man-show is going to be severely restricted by your lack of cash – new equipment, new hires, new anything is going to be a pipe dream until you land a big client or your first decent sized purchase.

Best For – A business with no employees and businesses that aren’t necessarily going to be full time endeavors to begin with.

 

Family/Friends

How it works – Pitching your parents or your financially well off friends on the merits of your business idea. This is usually either a loan or an equity share type of deal.

Pros – If your business goes well and you’re involved in an equity share arrangement with a friend/family member, then you’re keeping the profits “in-house” so to speak. Family members or friends are likely to be slightly more understanding with repayments if things don’t go as planned.

Cons – There is a very real risk of damaging the relationship if things go sour, and start-up companies can be bumpy roads.

Best For – Businesses that don’t require a heap of cash, and people with very understanding (or wealthy) family members/friends.

 

Business Loans

How it works – You apply for a loan from a lender or bank and hope you’ve made a good case for getting it.

Pros – Business loans scale better than the two options above – you’ll get more funding more quickly, which means you’ll have the potential to grow your business faster than if you were relying on your own funds or your family’s. To secure a loan, someone unemotionally involved will have to have agreed that your idea has merit and is willing to take a risk on it.

Cons – Getting a business loan in today’s economy isn’t easy – you can just about forget getting finance that isn’t secured against something, and the bank will also be considerably less understanding than old Uncle Bob if you miss a loan payment.

Best For – People who can actually afford a loan who want to grow their business quickly.

 

Outside Equity

How it works – Receiving outside finance, in exchange for a percentage of your company.

Pros – Potentially, you could get a hold of a lot of funding, while still being debt free. This is probably the fastest way to grow your business.

Cons – Giving up a share (this could also mean some of the control) of your company might not seem all that big a deal now, but wait until it starts making money...

Best For – High risk, high reward companies within markets that require a lot of backing to put a dent in the market. Think tech companies or companies in cutting edge industries.

 

Conclusion

Every method of funding has pros and cons, and it really depends on what business you’re running and where you want to take it that’ll determine the right course of action for you. Get some good advice – even if you have to pay for it, and never give up on your dream; after all, as the old saying says ”there’s always more than one way to skin a cat”.

David Ferrini is a freelance writer for First Choice Loans, a mortgage broker in perth that offers a range of finance options, including business and investment loans. Check out their Guides and Articles section for more information on finance, real estate and small business.

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