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Start a Business Now, Expand with Angel Investors Later

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If lack of substantial financial resources is keeping you from starting a business, consider what other entrepreneurs are doing. As it turns out, most new businesses appear to begin with limited capital.

The angel investors and venture capitalists enter the picture later for most companies. Small business is the primary contributor to the US economy. Large businesses get all the attention, but it’s small companies that provide most of the employment and national income.

Depending upon the source of information, the number of small business startups per year ranges from 600,000 to 6,000,000. Contributing to some confusion is the US government definition of a small business as one with less than 500 employees. That covers almost two-thirds of the companies in the country. This leads to unreliable analysis by comparing companies that differ in size by 100 percent.

Fortunately, a study by the University of Michigan provides new evidence for how startups are financed. The research team is still collecting data but has revealed some of its findings since the project began in 2005. The study covers 1,200 startup businesses.

Only a few startups with enormous potential are driven with outside capital. The majority of entrepreneurs begin without large sums of money. Yet, many thrive and produce financial security for their founders.

More than 80 percent of new businesses in the University of Michigan survey were funded by savings or credit cards of the founders. This includes loans from shareholders to newly formed corporations. About 17 percent of startups received financial assistance from family or friends.

Less than 5 percent of new businesses required professional investors. In fact, most newly formed companies build from startup with small amounts of capital. The median new business is founded with less than $4,300. The average of about $48,000 is skewed by the few new corporations that require extra money compared to most startups.

Your colleagues are likely incorrect when the say you need a lot of cash to start a new corporation. Most new businesses start modestly. They simply plan wisely for deployment of limited capital. Entrepreneurs then gain momentum with smart strategies to build cash flow.