Ever heard the phrase “You need to spend money to make money?” Well, almost every business has more expenses than profit in their startup phase. This means that new businesses often need to find sources of startup capital. Businesses use this funding to buy the supplies and materials they need to be able to make their products or sell their services. In this article, we’ll cover:
- Sources of startup capital
- Debt capital vs. equity capital
- Other ways to fund your new business
Sources of Startup Capital
Businesses can find startup capital in a variety of places. Depending on what the business needs are, different funding sources may be more beneficial.
- Personal funds: Some business owners may have large savings or the ability to take out a second mortgage to fund their new business venture.
- Friends and family: Wealthy friends and family may be willing to give out loans.
- Government programs: Federal and state programs hand out grants and loans to small businesses.
- Venture Capitalists: Startups that have high growth potential can get funding from private equity investors.
Debt Capital vs. Equity Capital
Investors have two options when funding your company. They can give you a loan, or debt capital, that has a set amount of time that it needs to be paid over. In this situation, the business owner retains full control of the business. Equity capital, on the other hand, gives partial ownership of your business to the person or company investing. When the company goes public or is sold to a larger corporation, part of the sales go to the investors. The benefit here is that the business owner doesn’t have to pay back any of the startup funding.
Do You Actually Need Startup Capital?
The quick answer is no. If you don’t want to have to pay back a loan or give up some shares of your company, you can always try to support yourself. This method is often more difficult and will take more time for the business to start being profitable.
Without startup capital, the business owner will most likely need to go without a salary for a period of time. This means that the business venture is usually a side project or second job. With less time to spend creating products or providing services, it will take longer for the business owner to take on the company full time.
All in all, it’s up to the business owner to decide which option is best for their business. If you’re still having trouble deciding whether to find sources of startup capital or try building up your profit on your own, our professionals at Lodestar can help. We have access to a wide network of funding sources and can help you find which is right for you.