Entrepreneurial endeavoring attracts a risky lot. Once the great business idea is developed, it is time to handle the finances.
First, it is best to obtain a clear understanding of the difference between business capital and a business loan. The word “capital” has different meanings in finance, economics, and politics. Business financial capital represents ownership in a business. If it is a sole proprietorship business venture that means 100% capital belongs to the sole business owner. Generally, a business has both capital value and liability exposure. Loans represent the leasing of capital, typically with interest, from another. It must be repaid. Loans come with certain legal obligations and constitutes a business risk or business liability.
Self-Help Financing: Investing Personal Capital in Your Business
The classic source of funding for the budding business venture is the money of the start-up sole trader or partnership. Ask, “What do I own?” Go through everything – money, property, and investments. Make a list. What else will the start-up owner commit financially to the business? What can be liquidated to provide cash? What property won’t the owner touch under any circumstances? Can income from the existing employment of the start-up owner be used to fund the venture?
The first start-up business cost is generally paying for the new business filings for a start-up venture as required by most local, state, and/or federal government agencies. A sole proprietor or new partnership owners can give the new firm a loan from personal assets as described above for this start-up cost. For a small business venture, this may include financial resources from cash-on-hand and/or the liquidation of some tangible assets, like a seldom used car, etc.
It is best practice at the start-up stage for the owner to do as many things himself rather than asking or paying others. Substantial savings come from an entrepreneur’s prior work experience, imaginative business ideas, and the good advice of senior business owners. If no immediate family member can serve as business mentor to help think of ways the business can finance itself, the D.C.-based organization Counselors to America’s Small Business (SCORE) is a nonprofit organization that offers free business mentors and advice.
Business Loans: Request Credit Financing from Others
In seeking credit from others, first talk with potential suppliers and vendors about obtaining a line of credit for inventory and/or supplies. A new business should try to gain supplier confidence before credit is needed. Be prepared to complete a credit application that is similar to other financing transactions. Have professional references available.
Unlike supplier credit, financing lent in the form of a non-purchase money agreement includes credit cards and bank lines of credit that are not contingent upon purchasing products or supplies from a particular business. Bank lending often requires security financing or impressive business history. If the owner can secure bank financing, pay the higher finance rates and spend more time on the research and development of the product and/or service. Remember, credit card financing is generally offer the highest lending rates. Do factor this type of guerrilla financing as a reduction from overall profit potential.
Collateral may be required for a traditional bank loan. If the start-up business owner does not have sufficient credit history or collateral, this is where the help of close associates willing and able to pledge sufficient collateral plays a role. This is a big financial risk to ask of another and may be the time to ask what else can be sacrificed to finance the business?
Gifts: Obtain a Business Venture Financial Donation
Family and friends can be good sources of gift business funding. Gifts are good. Ensure the nature of these types of contributions are clearly set-out as a gift. There are no misunderstanding between parties once a business donation is clearly established as a gift at the outset. This can be done in writing, even if it is an informal and hand-written understanding between the parties.
It is best not to approach potential business gift givers until the business plan is in writing. The business plan should include sound business cost figures from requested quotes. Don’t hesitate to ask family and friends to join in the research and development stage. This will provide a greater sense of collective ownership and responsibility to the start-up firm.
From commercial business loans to good-will capital, an entrepreneur needs it all when employing grassroots funding efforts. A solid business plan helps a great deal to get your business ideas across to others. Show business feasibility through financial estimates. Remember, family and friends may also be a source of financial support through business donations.
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