subject: Seek Funding For Your Small Business: The Start-Up Stage [print this page] Seek Funding For Your Small Business: The Start-Up Stage
Small businesses often fail from lack of adequate capital. That is why you should have a sound estimate of how much money you will need and where it will come from early on in the game.
The first stage that you must take into consideration is the start-up stage. It the period when you need seed money for operating such as your rent, supplies, inventory, equipment, wages, advertising, licenses and fees, and other expenses associated with starting the business.
Here are some smart ways and means on how you can get adequate seed money to take your business off the ground.
Personal - You and your partner. You and your business partners, if you have them, will be the major source of cash during the start-up stage. Besides putting up the savings you have accumulated, other personal resources might include borrowings backed by secured collateral, such as stocks and bond, loans against the cash value of existing life insurance policies, or borrowing against the equity you have built up in your home. Most small business like greeting cards printing shops, custom greeting card printing, shops, boutiques, manufacturers and other types of businesses, start this way: funds come from personal resources and borrowings of the entrepreneur.
Knowledgeable investors will not put money into a new business unless they have concrete evidence that the entrepreneur has personally made a sizeable financial commitment in the business. They know from experience that if the venture turns sour it will be easier for you to back out if you do not have your own money at stake. For instance, many competitors sprout in your area like also offering greeting cards printing and other services that is very much similar to yours and at a lower price. That will be the start of the business downfall. Thus, to obtain sufficient financing, you will have to invest a substantial portion of your personal net worth in your venture.
Investors. Investors, whether financial institutions, venture capital firms, or individuals, invest in people as well as in companies, products, or ideas, so take advantage of this. Your money talks when you demonstrate your personal commitment to the venture by putting up your own resources. And investors will not usually listen to you unless you do.
Numerous studies have shown that when your cash contributions are sufficient to finance initial business operations, outside funding usually comes from wealthy individuals. As a general rule, try to put in at least 50 percent of needed seed money for yourself. The reasons for this are: individual investors probably would not be interested unless you have contributed about this proportion, and contributions by individuals will frequently take the form of equity or ownership interest in your business. As you put more than 50 percent of the total capital, the greater becomes your independence in controlling the business, and the more substantial your share of the profit.
From friends and relatives. Seed money from friends and relatives is very common in start-up operations even though borrowing from friends and relatives are frowned at by experienced business people. It is dangerous to mix social or family relationships with business. Friends and relatives can, and often do, interfere with business policies and operational matters.
Outside sources. If you must seek outside sources for seed money, be careful not to accept more than you need. It may be comfortable to have a capital cushion; but the cost will be either dilution of your ownership and control position, or early burdening of your cash flow with excessive loan repayment charges.
The financial performance of your business becomes more impressive to future investors if it has been achieved with a small rather than a large amount of seed money. And this will make it easier for you to obtain the additional funding you will need as your business grows.
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