Most funding options fall into one of two strategies, debt financing or equity financing.
- Debt financing is when you take out loans and pay them back via a set installment plan at specified interest rates, whether or not your venture succeeds. If your business does succeed, once you pay back the loans you retain all the profits and control of the company.
- Equity financing is when you sell shares or ownership in your business in exchange for cash. You don’t owe money if your venture fails, but if it succeeds you won’t see all the profits, since some of the money goes to your investors/part owners.
Whether you’re interested in debt or equity financing, there are many places to get loans of varying sizes.
- Family and friends are a one-time source for smaller loans. Personal loans allow you to get the money quicker and with fewer contractual strings attached, but you risk putting a strain on your relationship if the venture falls through. Always complete a Promissory Note to make the terms of the loan (and its repayment) clear to both parties.
- Credit cards work for short-term financing, but you must manage them wisely and pay them off quickly. Keep an extra card in case of emergencies.
- Banks are good resources for loans ranging from microloans of hundreds of dollars to major loans of six figures. You can also open a line of credit where you don’t start paying interest until you reach your maximum. It’s easier to get loans if you already have a relationship with the bank, and can back loans with assets or with a third party guarantor. Banks also require much more proof of financial responsibility, and can take a while to process loans.
- Angel investors can help finance your project, or if your project is large enough, you may be able to interest a Venture Capitalist (they typically don’t look at anything under $1 million). Talk to a financial advisor to help you find these potential investors. To find an investor, check out the Small Business Investment Company Program of the Small Business Administration.
- Grants-- especially for tech companies-- are a great source of funding if you can get them. Keep in mind that grants are highly competitive, and you’d have to follow strict guidelines for using the money. Check with the Small Business Innovation Research Program of the SBA.
- If you need help with your Business Loan Application, the SBA has a loan guarantee program to help lenders approve loans for for-profit businesses of certain sizes. Common requirements for loans include statement of purpose for loan, a history of the business, projected opening-day balance sheets, lease details, the amount invested in the business by the owners, projected income/expenses, personal financial statements of owners, and personal resumes of owners.
Finally, while it may take a while to find the right source of funding, if you keep asking around and stay persistent, and really believe in your business model, someone is bound to say yes.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.