Asking for a loan from the bank or hard money borrower, requesting state aid, entering a business incubator or seducing a business angel are some of the main ways to obtain funds for your business project.
Having a good business idea is the seed of any business project. But for that seed to grow, it must have the necessary time and resources. For this, there are all types of financing channels.
Some small projects, such as the bakery, manage to take their first steps thanks to microcredit. Other more prominent companies have combined the smart capital of two accelerators with the help of various public bodies.
Whatever the funding path is chosen, the important thing is that it fits the needs of the entrepreneur as a ring to the finger.
To choose the most suitable alternative – it’s essential to assess issues such as the desired amount, the repayment term and the assumable risk (especially in loans that require the presence of a guarantee). It is also necessary to decide if the debt is used or it is preferable to let new investors in.
If you opt for the capital route, you will have a cash account without the need to borrow. The risks will be shared between the partners, who will participate in future earnings and also contribute knowledge and experience.
On the other side of the coin, “your percentage of the company will decrease, and you could lose control of it.”
Before deciding which side to turn to, it is vital to know the different financing instruments for anyone who wants to find a way to finance the first start-up and all the advantages and disadvantages of each of them:
- Hard Money Loan
With this type of financing source, the lender does not take into account the current finance or the credit status of the borrower but the value of the real estate that is used as collateral.
Hard money loans in Los Angeles, as you might guess, not a rare phenomenon these days. Not just start-ups, but even stable companies choose to use this type of loan format to secure the necessary capital in a short period.
While the property used to secure the loan is sufficient to cover the balance and interest rates involved in the transaction, the lender has the assurance of being able to recover financial damage acquired by the default.
Given all that is required is proof of ownership of the assets that are used as collateral, the response time in obtaining this type of loan is in the most time very short. Often, a credit that can be used as a temporary action to fund some imminent schemes while a long-term loan deal is prepared.
2. Bank Loan
Banks allow a broad set of possibilities to fund new companies: with microcredits or loans to entrepreneurs, mediation lines and loans with special conditions (for example, when the company has a social purpose or is linked to research.)
Loans are subject to interest, which currently ranges between 3.5% and 7.5% annually.
The advantage is that they allow 100% control of the capital. At the time of requesting a loan, entities value the entrepreneur to present a viable business plan, with a well-reasoned expense and income hypothesis.
They also appreciate that the entrepreneur himself writes the project and that it’s not a mere copy.
This term means starting a company without external help while investing your savings and minimizing expenses.
In this case, you have to make controlled investments, but they give you a lot of information, such as the first versions of the product.
Ideally, get the first income through tactics such as guerrilla sales.
4. Family & Friends
Using this alternative, allows you to obtain amounts that are not negligible quickly and with much less demanding requirements than those imposed by a bank or a professional investor.
Also, the conditions tend to be laxer in terms of repayment terms and interest. Funds can even be obtained for free by a kind of donation or a zero-rate investment.
The most apparent danger is that if the company does not succeed (95% close in the first three years, according to statistics), a family split is generated to happen.
Since you will want to avoid that scenario, it is essential to understand the risks well and present a serious business plan.
5. Public Finance Authority
Another option is to request the help of a public body, either in the form of grants or soft loans.
These entities generally offer various aids for start-up companies, especially for those scalable and technology-cutting or with a social or environmental component.
Experts value this resource but recommend that it not be the only source of funding.
That a prestigious investor contributes money to the project is usually worth more than half of the capital invested. That, of course, can only pay up in the future.
This option allows for obtaining funds through a multitude of small investors.
Depending on the platform chosen and the project in question, they can invest selflessly or in exchange for a reward or a share in the capital. Crowdfunding organizations can also make a loan in exchange for interest.
It is a fast and easily accessible way of financing for the entrepreneur, which is regulated and supervised by the state.
7. Angel Investors
If the first business metrics accompany, you can also open a round of financing between professional investors or use investment angels or venture capital funds.
These investors not only provide money. They are also specialists in the sector and can provide valuable knowledge and contacts.
If you decide to attract them, it should be remembered that “investors invest in lines and not in points. They are not attracted to sporadic and timely data. They seek a continuous relationship over time.
There are numerous ways to achieve the goal that you are having in your mind at the moment, with patience and time, the right answer will be found.
Various different sources of financing can fuel up your business idea, but at the end of the day, it’s best if you consult the financing professional to give you the final word.
And of course, if you haven’t done so before, head over to SBA (Small Business Administration) website and check out what are the conditions for requesting a loan or investment fund for your case.