So you’ve come up with an idea for a business? Congratulations! Now you need startup financing – that initial infusion of money needed to turn the idea into something tangible. And that’s where it becomes tricky.
When you are just starting out, you’re not at the point yet where a traditional lender or investor would be interested in you. So that leaves you with selling cherished assets, borrowing against your home, maxing out credit cards, dipping into a 401(k), and asking loved ones for loans. There is a lot of risk involved, including the risk of bankruptcy with your personal finances and soured relationships with friends and family.
A major key is to ramp up initial operations as quickly as possible to get to the point where outside investors can see and feel the venture, as well as understand that you took some risk getting it to that point.
Some businesses can also be bootstrapped. They can be built up quickly enough to make money without aid from investors who might otherwise come in and start calling the shots.
With so much at risk, it is important to have a strong business plan in place, and to seek out advice from experienced entrepreneurs and experts — people who might also invest in your business someday.
There are at least three general categories of startups , divided by their financing possibilities:
The “just get going” startup needs customers, not much financing. That includes a lot of small service businesses, from the kid cutting your lawn to your freelance bookkeeper or accountant, single-shingle lawyer or one-person graphic artist operation.
The elite, successful tech-savvy entrepreneurs with good track records have access to angel investment and venture capital. If you’re one of them, you know who you are.
The middle-ground businesses need serious–as in six figures–startup money but aren’t elite. If you’re in the middle-ground category, but don’t have assets to pledge, don’t have friends or family with money, and don’t have a real track record for investors, then change your plans. Get real.
Startup capital may be provided by venture capitalists, angel investors, or traditional banks. In any case, the entrepreneur who seeks startup capital generally has to create a solid business plan or build a prototype in order to sell the idea.
Startup capital is used to pay for any or all of the required expenses of creating a new business, including initial hires, oﬀice space, permits, licenses, inventory, research and market testing, product manufacturing, marketing, or any other expense.
In many cases, more than one round of startup capital investment is needed in order to get a new business oﬀ the ground.