Small Business Start-Up Financing: Quick Options
What Easy Methods Can Used for Seed Capital to Start a New Venture?
Apr 19, 2009
One important step almost every entrepreneur must take when starting a new small business is securing start-up financing. This initial stage of funding, also known as seed capital, is designated for the preliminary expenses that come up when getting a new venture off the ground. These expenses generally include legal fees, product or concept development, and the purchase of necessary equipment and supplies. In other words, the start-up financing should cover expenses until the new small business becomes an operational entity that is generating income.
When looking for start-up financing for a new small business, aspiring entrepreneurs have several alternatives. One should keep in mind, however, that depending on the state of the economy some options may be more attractive or more available than others. The bottom line: before jumping into any finance option, make sure to do some research!
This section deals with several funding sources that are in general easier to obtain then the other, more formal methods of start-up financing.
1. Using Personal Assets
Tapping into personal assets to finance a small business start-up is certainly one of the most convenient alternatives. Aside from cash savings, popular options include taking out home equity loans, cashing in on a life insurance policy (called a life settlement), or using other assets as collateral for a loan. Though this may be a quick and easy source of financing, it goes without saying that it involves taking a considerable risk should the venture be unsuccessful.
2. Asking Friends and Family
Friends and family may be more willing to offer money then would a professional lender, and there may be room to negotiate favorable conditions for repaying the loan. Today, such lending arrangements can even be formalized via peer-to-peer lending sites, such as Virgin Money. But a word of caution here. Even if this is an option, money can put a strain on relationships. So while the business may be well- funded, the borrower may end up emotionally bankrupt.
3. Peer-to-Peer Lending
Peer-to-peer, or P2P lending, is a form of financing that occurs directly between individuals or "peers" without the involvement of a traditional financial institution. Many sites, such as Prosper.com, have set up an "online marketplace" where borrowers post their loan requests and are connected with various lenders who "bid" on the chance to finance the loan. Keep in mind, however, that loans are usually limited to no more than $25,000, and defaulting on P2P payments will still tarnish one's credit rating.
4. Taking on a Partner
As the old saying goes: two heads are better then one- and so are two sets of pockets. One can increase the availible asset pool by having another person invest in the company as a partner. The investor can be either an active partner or a "silent" one who is not involved in the business' daily operations. One should keep in mind, however, that before the partnership is established, all partners should make it a point to write a formal, legally-binding agreement detailing the nature of the partnership as well as what will happen in the event of a partner buy-out.
The next section deals with the more "traditional" forms of small business start up financing.
