From business loans and investments, to personal funding, business plan writer and strategy consultant Jessica Oman looks at the pros and cons of each source of capital startups tend to use
Lack of capital is a big issue for even the tiniest of start-ups. Whether you need $5,000 or $500,000 to launch your new business, that money has to come from somewhere. Many new entrepreneurs forget that choosing a source of funding is an important strategic decision that can significantly impact your business months or years after launch.
Common sources of start-up capital include investors (angels or venture capitalists), lenders (bank loans or lines of credit), “love money” (cash from family and friends), or owner’s contribution (that’s money you put into the business yourself). Many new businesses use a combination of these funding sources. But how do you know what’s best for your new business? Let’s look at the pros and cons.
Pros: Investor capital keeps your business debt-free. If you have a business that’s positioned to grow really fast and you can assure the investor of a quick, high return on their capital, investors can be an excellent source of funding for your business.
Cons: You’ll have to give up some percentage of ownership in your business, and it will probably be more than you think. You’ll have to answer to someone else before making key decisions in your business, and the more equity the investor has, the more he or she can influence the direction of the business.
[pullquote]Starting a new business is really exhilarating, but don’t let the excitement of your launch cloud your decision making.[/pullquote]
Pros: A lifestyle or family business, like a retail store or a restaurant, is a great loan candidate. You can grow slowly and sustainably, and once you’ve paid off the loan, you still own 100% of the business. If you have good personal credit and can contribute some of your own capital, you may be eligible for a very reasonable interest rate on the loan, and the faster you pay it off, the less interest you’ll have to shell out.
Cons: If cash is really short, your debt obligations could put your business under. You have to make sure you’ll always be able to afford those monthly payments even if the business doesn’t earn as much as you’d hoped.
Pros: Friends and family often believe in you and trust you, so their lending or investment conditions can be really favorable. Depending on what arrangement you make with your BFF or your mom, you might not ever have to pay back the money!
Cons: Entrepreneurs often forget to formalize agreements with friends and family, and that often leads to conflict down the road. Even if you’re very close to your financing source, draw up a legal agreement the same way you would with any investor.
Pros: You don’t owe anything.
Cons: This is cash that you might have been saving for something else; can you live without it and risk losing it all?
The Bottom Line for Business Financing
Starting a new business is really exhilarating, but don’t let the excitement of your launch cloud your decision making. Always think at least three years ahead and consider all possible scenarios for your business before you choose a funding source. And spend wisely!