It is every entrepreneur’s dream to start a business and have it experience a hockey-stick type of growth. While a sizeable number have their dream come true, many fail. The denominator is always lack or inadequate capital. Frequent changes in the economic and business landscape have forced entrepreneurs to change tact as far as seeking and financing their business is concerned. Some financing options are either expensive or will lead to dilution of ownership.
Legitimate ways to get capital for your business
This method of financing remains the most popular when sourcing for initial capital. It is also known as boot-strapping or self-funding. The owner will use his personal assets as collaterals when obtaining loans, use his credit cards to settle business expenses and literally bring in money. This method is always used before bringing in other parties to invest in the business.
Funding from family and friends
This is also among the legitimate ways to get capital for your business. The adage goes that those who are very close to you will always believe and invest in your ideas. The flipside is that the cordial and existing relationships are put at a very great risk should the business fail to pick up or perform below expectations. Another disadvantage is the constant meddling in the structuring of the business from family and friends who have a stake in the business.
This is financing sourced from banks and other financial institutions. Banks have the most stringent conditions when financing businesses. There is some glimmer of hope because other companies are now giving loans to small businesses. The loans are easy to access and quick in processing.
The following are needed to access these easy loans: growth projection, business plan and evidence of financing from the owner. While the cost of capital (interest) is not high, the business remains in the firm control of the owner.
Also called seed investors or angel funders. These are investors who finance startups. They majorly assist startups in taking their first steps. They do not look at the short-term aspect of the business but rather at the long term. Their interest is never in the profitability of the business. When they inject money in the business, they either become shareholders or debt holders. This means that they start getting their returns or their debt starts being repaid when the business is on a profit trajectory.
With this kind of ownership arrangement, there exists a fiduciary duty and responsibility by the business owner to the angel investors. The best interests of the angel investors have to be taken care of and protected.
Regardless of the financing option taken, keep in mind the cost of the capital and the impact on the ownership of the business. Ask yourself whether the interest you are paying is too high, the legal costs to be incurred in structuring the financing are high, or the investors you are bringing on board will dilute the shareholding or make you lose control of the business you have painstakingly built. Lastly, always make sure that the capital is from a legit source.