Is A Commercial Finance Company The Same As A Bank Small Business Start Up Financing

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Small Business Start Up Financing

The number one question I ask as a small business coach is: Where do I get my cash?

I am always happy when my clients ask me this question. If they ask this question, it’s a sure sign that they took financial responsibility seriously to begin with.

Not All Money Is The Same

There are two types of seed financing: debt and equity. Consider which 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.

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

Debt financing loans are relatively small and short term and are provided based on guaranteeing your repayment of your assets and personal equity. Debt financing is often the finance strategy of choice for the early stages of a business.

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 portion of your business profits. This basically means that you will be selling part of your company to receive funds.

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

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

7 Main Funding Sources for Small Business Start-ups

1. You

Investors are more willing to invest in your start-up when they see that you are risking your own money. So the first place to make money when starting a business is your own pocket.

Personal assets

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

A job

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

Credit card

If you’re going to use plastic, look for the lowest interest rate available.

2. Friends and Family

Money from friends and family is the most common non-professional source of funding for starting a small business. Here, the biggest advantage equals the biggest disadvantage: You get to know these people. Unspoken needs and attachments to results can cause stress that will lead to staying 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 in start-ups with the expectation of high returns on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels do not usually raise money in professionally managed funds. In contrast, angel investors often organize themselves into angel networks or groups of angels to share research and raise investment capital.

4. Business Partners

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

5. Commercial Loans

If you are launching a new business, there will likely be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that have demonstrated 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 consider whether you invest your own money upfront before giving you a loan.

6. Seed Funding Company

Startup funding companies, also called incubators, are designed to encourage entrepreneurship and nurture new business or technology ideas to help them become attractive to venture capitalists. Incubators typically provide 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 Fund

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

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