Staring a new business is the great dream of many of us. To do it, you need money. So, where can you find it?
One of the most important factors in the creation of a new business venture is financing. It is usually called start-up capital, and there are various ways it can be acquired. The first step is careful planning and a serious evaluation of just how much capital is going to be needed. When you begin your search, this plan is going to be the essential tool that will be used to convince investors and loan officers of the prospects of your business venture. The plan needs to take a long hard look at a number of different factors. It must be honest about the risks involved, but must also show how the venture can succeed if properly capitalized and how much profit can be anticipated.
The first source of investment for your business is going to be your own wallet. You need to determine how much of your own money or property that you are able and willing to risk to fund your new business. This figure establishes the very important debt to equity ratio. This is the amount of debt as compared to what you are willing to risk of your own funds. The debt to equity ratio will guide you toward the proper financing. If your debt to equity ratio is low, it means that you have quite a bit of your own funds or property invested into the business and you can look to some more debt financing. If it is the other way around, additional debt is not the best way to go and you will need to seek venture capital.
Debt financing refers to loans from banks or credit unions. It is money that is loaned and must be paid back within a set time frame. The banks are going to be taking a close look at your plan and at your debt to equity ratio. One creative way of using debt financing is to attempt to secure a credit line from the bank. This method allows you access to the funds you need as you need them. If you are more successful than you anticipated, you do not use the funds still in your credit line and avoid interest expense.
Venture capital is basically investment. Venture capitalists are going to be willing to share in the risk of your venture unlike banks that will expect to be repaid regardless if you succeed or fail. A venture capitalist can be a friend or a relative who has faith in you, or it can be a professional investor looking for a good return on his investment capital. Although investment capital goes into the equity side of the debt to equity ratio, it does present some potential problems. Some venture capitalists are going to want to exercise a certain degree of control over your business, and their goals may not always be compatible with your vision for your business. This control takes many forms such as the issue of stock, and you need to make sure you are not exchanging control of your business for the money to fund it.
The United States Small Business Administration (SBA) can aid in financing a new business. They provide information on start-up capital and also have a guaranteed loan program that can be helpful in securing debt financing.
Winston Goldstein is with MoneyMakerstop.com - your source for
money articles.
