Show Me the Money: 7 Cash Stashes for Small Business Start-Ups

As a small business start-up coach, I get asked a lot of questions.  The most frequent one:  Where do I get start-up cash?

I’m always glad when my clients ask me this question. Their
readiness to take financial responsibility for their
business is a sure sign that they’re serious about starting
it.

Not All Money Is the Same

There are two types of start-up financing: debt and equity.
Consider what type is right for you.

Debt Financing is the use of borrowed money to finance a
business.  Any money you borrow is considered debt
financing.

Sources of debt financing loans are many and varied:
banks, savings and loans, credit unions, commercial finance
companies, and the U.S. Small Business Administration (SBA)
are the most common.  Loans from family and friends are
also considered debt financing, even when there is no
interest attached.

Debt financing loans are relatively small and short in term
and are awarded based on your guarantee of repayment from
your personal assets and equity.  Debt financing is often
the financial strategy of choice for the start-up stage of
businesses.

Equity financing is any form of financing that is based on
the equity of your business.  In this type of financing,
the financial institution provides money in return for a
share of your business’s profits.  This essentially means
that you will be selling a portion of your company in order
to receive funds.

Venture capitalist firms, business angels, and other
professional equity funding firms are the standard sources
for equity financing.  Handled correctly, loans from
friends and family could be considered a source of
non-professional equity funding.

Equity financing is usually a larger, longer-term
investment than debt financing and often involves stock
options.  Because of this, equity financing is more often
considered in the growth stage of businesses.

7 Main Sources of Funding for Small Business Start-ups

1.  You

Investors are more willing to invest in your start-up when
they see that you have put your own money on the line.  So
the first place to look for money when starting up a
business is your own pocket.

Personal Assets

According to the SBA, 57% of entrepreneurs dip into
personal or family savings to pay for their company’s
launch.  If you decide to use your own money, don’t use it
all.  This will protect you from eating Ramen noodles for
the rest of your life, give you great experience in
borrowing money, and build your business credit.

A Job

There’s no reason why you can’t get an outside job to fund
your start-up.  In fact, most people do.  This will ensure
that there will never be a time when you are without money
coming in and will help take most of the stress and risk
out of starting up.

Credit Cards

If you are going to use plastic, shop around for the lowest
interest rate available.

2.  Friends and Family

Money from friends and family is the most common source of
non-professional funding for small business start-ups.
Here, the biggest advantage is the same as the biggest
disadvantage: You know these people.  Unspoken needs and
attachments to outcome may cause stress that would warrant
steering away from this type of funding.

3.  Angel Investors

An angel investor is someone who invests in a business
venture, providing capital for start-up or expansion.
Angels are affluent individuals, often entrepreneurs
themselves, who make high-risk investments with new
companies for the hope of high rates of return on their
money.  They are often the first investors in a company,
adding value through their contacts and expertise.  Unlike
venture capitalists, angels typically do not pool money in
a professionally-managed fund.  Rather, angel investors
often organize themselves in angel networks or angel groups
to share research and pool investment capital.

4.  Business Partners

There are two kinds of partners to consider for your
business:  silent and working.  A silent partner is someone
who contributes capital for a portion of the business, yet
is generally not involved in the operation of the business.
A working partner is someone who contributes not only
capital for a portion of the business but also skills and
labor in day-to-day operations.

5.  Commercial Loans

If you are launching a new business, chances are good that
there will be a commercial bank loan somewhere in your
future.  However, most commercial loans go to small
businesses that are already showing a profitable track
record.  Banks finance 12% of all small business start-ups,
according to a recent SBA study.  Banks consider financing
individuals with a solid credit history, related
entrepreneurial experience, and collateral (real estate and
equipment).  Banks require a formal business plan.  They
also take into consideration whether you are investing your
own money in your start-up before giving you a loan.

6.  Seed Funding Firms

Seed funding firms, also called incubators, are designed to
encourage entrepreneurship and nurture business ideas or
new technologies to help them become attractive to venture
capitalists.  An incubator typically provides physical
space and some or all of these services: meeting areas,
office space, equipment, secretarial services, accounting
services, research libraries, legal services, and technical
services.  Incubators involve a mix of advice, service and
support to help new businesses develop and grow.

7.  Venture Capital Funds

Venture capital is a type of private equity funding
typically provided to new growth businesses by
professional, institutionally backed outside investors.
Venture capitalist firms are actual companies. However,
they invest other people’s money and much larger amounts of
it (several million dollars) than seed funding firms.  This
type of equity investment usually is best suited for
rapidly growing companies that require a lot of capital or
start-up companies with a strong business plan.

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Susan L Reid, MS, DMA, Small Business Start Up Coach &
Accidental Pren-herâ„¢ is the soon-to-be author of
Discovering Your Inner Samurai.  She provides value,
inspiration and direction for entrepreneurial women
starting up and launching small businesses.  For ideas and
start up tips, subscribe at
http://SuccessfulSmallBizOwners.com for your free e-Zine
today.  To read about what’s inspiring other pren-hers, go
to http://susanreid.typepad.com