When
looking for capital sources, borrowing from banks is every small entrepreneur’s
nightmare. In the search for capital sources one can get turned down for bank loans
for a variety of reasons, including lack of assets, collateral and business experience.
Don’t despair though, as there are several common types of alternative capital sources
for setting up a business available to young companies. The first sources you should
consider as capital sources are your own savings and investments.
However, the disadvantage of self-financing is that if things happen not to turn
out the way you want them to, it will be your money that goes down with the ship.
“Angel investors” is the name given to affluent individuals who provide capital
for a business start-up. Usually in exchange for the capital sources they provide,
they expect ownership equity. Although their rate of return is more than would be
given by more traditional investments (typically 25% or more), angel investors are
an excellent place to get capital sources. Besides, since angel investors are often
retired business owners and executives, they can also provide valuable management
advice and important contacts. Peer-to-peer lending is a means of getting capital
sources by which borrowers and lenders may transact business without traditional
intermediaries, such as banks.
The process may, however, include other intermediaries who package and resell the
loans but they are ultimately sold to individuals or pools of individuals. When
trying to find capital
sources, instead of a bank loan try borrowing smaller sums
from several family members, friends, or colleagues. The capital sources lenders
have no legal ownership in the business, but can act as advisors for your venture.
Remember, however, that nothing causes tension in a family like lending money that
is never paid back. There are many business owners who use their credit cards as
capital sources to fund their businesses. As you may know, credit cards offer the
ability to make purchases or obtain cash advances and pay them at a later time.
But as a long-term financing method, they can be really expensive.
Another source of capital for setting up a business is bootstrapping. It is a way
to finance a business by saving rather than borrowing money. It’s being as frugal
as possible so your business can be started on as little cash as possible. Bootstrapping,
in its simplest, is the use of private credit cards for capital sources, but a wide
variety of methods are available for
entrepreneurs who are seeking capital sources.
Other forms of bootstrapping include owner financing, minimization of accounts receivable,
delaying payment, minimizing inventory and subsidy finance. Venture capital sources
are not suitable for all entrepreneurs. It is an option well suited for small companies
that have a seasoned management team and very aggressive growth plans.
You ought to know that
venture capitalists will rarely invest in small businesses
that have no intention of going public. On the other hand, a company may have the
qualities venture capitalists seek such as a solid business plan, a good management
team, investment and passion from the founders and a good potential to exit the
investment before the end of their funding cycle. In this case, it may be easier
to find capital sources in venture capital. But keep in mind that if you intend
to find capital sources in venture capital, the
venture capitalist objective is
to invest in a company for a short period of time – say 5 years – and then cash
out of the business while making a significant return on their investment.