What To Expect From Startup Capital Sources

Posted On:

Planning involves having an idea of what a company can expect from distinctive sources of capital. The most essential money a new corporation needs is for the startup phase.

A lot of startups bootstrap their operations. Bootstrapping involves a slow start in order to internally finance business growth from a few sales into larger volume. This requires having a tight control on costs and maximizing the amount of revenue recycled into the company. Eventually, the new corporation builds equity for the founders, who obtain a higher price when outside capital sources fund the business.

The focus for bootstrap capital is on closing sales and delivering a stream of revenue. This has the added benefit of forcing a new corporation to appeal to customers. The company captures a proven market by fulfilling a consumer need. In the process, the business demonstrates its viability among outside investors.

Bank loans are still a source of funding for small businesses. However, banks have never been a common source of borrowing for startups. The most likely bank loan situation for a new company is an SBA-guaranteed loan. These types of loans are generally less than $50,000. But most companies launch on a lower amount than that. Having some equity capital is certainly beneficial. This helps attract lending institutions by showing that other money is at risk. Bootstrapping for a while provides a new corporation with a little equity capital.

Eliminating or shortening the bootstrapping of a new corporation is often achieved by having friends and family fund the startup. Although these sources are likely to provide generous terms, such arrangements should receive professional treatment. Even friends and family want to documentation of their investment. Despite the personal nature of your relationship with them, they expect you to use their capital wisely. So you must treat the funding like any business arrangement.

Angel investors are looking for ways to generate a return on some of their capital by backing startups. Providing seed capital is a high-risk endeavor for angel investors. A new corporation that pursues this funding source should prepare to give investors a substantial portion of ownership. In addition, angel investors take some active involvement in your operations. However, this can present positive opportunities for input from those with business experience plus provide a conduit to future rounds of capital.