Government grants and subsidies are excellent sources of start-up financing, and they help bolster the startup culture in their countries. These funds have no conditions attached, so they can function like quasi-equity in the project. The money is also not required to be paid back, but the recipient cannot misuse it for other purposes. This is an important aspect to consider before pursuing start-up financing. A small business owner should never rely exclusively on government funds.
The credit market is imperfect and has a hierarchy, which is why only a minority of firms can obtain bank debt or outside financing. This financial leverage is not random and increases with the amount of initial capital a firm has, but decreases with the number of owners and work experience of the founders. Hence, more personal wealth a start-up has, the lower the risk of going into debt or bankruptcy. This is why crowd equity investors are valuable to the society.
Personal savings are another common source of start-up financing. In addition to personal savings, entrepreneurs can also access money from their 401(k) accounts. A small business with a simple website may only require personal guarantee and a laptop, while a local bakery needs more cash. Nevertheless, the key to starting a business is to come up with a good idea backed by a good business plan and the necessary resources.
While traditional debt-based sources of financing may offer low-interest rates, they are not as flexible as business loans. However, they can be helpful for entrepreneurs when bank balances fall below a minimum level. For such situations, a bank overdraft may be the best option. Moreover, the flexible terms of these loans also make them ideal for short-term liquidity crisis or seasonal cash flow fluctuations. You should be aware, however, that the risk tolerance of family and friends is relatively high.
If you cannot secure startup loans from banks, you can also apply for loans from credit card companies. Credit cards can be used for part of the start-up funds, but the interest rate is very high. Venture capitalists are private investors that provide start-up financing. However, it is necessary to prepare a strong business plan and project sales figures before seeking their money. In addition to loans and bank loans, other sources of start-up financing are less common, but nevertheless viable.
Among the sources of start-up financing, self-financing from personal savings was the most common. The survey also revealed that this method was more popular among minority-owned firms. More than half of minority-owned firms started their business with self-financing. The rate for minority-owned firms is even higher. The percentage of minority-owned firms is higher than the overall share. Moreover, Hispanic entrepreneurs accounted for 21 percent of new business starts in 2015.
Venture capitalists use the money of existing investors to invest in startups with high growth potential. However, they demand ownership in the firm in return for their money. While these investors provide guidance, knowledge and industry connections, they expect a decent return when the company becomes profitable. Some venture capitalists require a seat on the board and will want a say in major decisions made by the company. In other words, they can give valuable advice to entrepreneurs.