Your plan for financing a new business depends largely upon the type of company you create. Plenty of people start a business and spend no time raising money. In fact, most small businesses are not capital intensive.
A handful of business startups have special ideas with the high growth potential to attract angel investors. But simple local business operations are more common. These new companies provide all the financial security and personal freedom that most entrepreneurs desire. More importantly, they are easier to finance.
Capitalizing a startup business usually involves personal borrowing by the owner. Entrepreneurs rely upon their individual credit rating to obtain loans from banks or credit unions. An especially common means of funding a new business operation is with personal credit cards.
Obtaining a loan is actually much more common than angel investment. But, some new businesses have the enormous potential that requires and attracts investor capital. That’s the path to take if your business needs plenty of money to reach its target and, by doing so, provides avenues for investors to cash out. A new company with a local market has no need for angel investors to provide equity capital. Your startup business is more likely to borrow – even if that money is outside capital loaned by family or friends.
If your business requires hard assets, they are used as collateral for loans – often provided by the manufacturers. By far, the most common financial tool used by small businesses is trade credit with suppliers. You qualify for this financing as a new business because companies want you to purchase their products.
The most important financial step for a new entrepreneur is to simply ask for funding from appropriate sources. In most cases, that means reliance upon personal credit, borrowing from family and friends, and supplier financing.