Business Capital Sources: The Pros and Cons of Each Funding Option
This article is posted under Business.
Do you want to start your own business?
I’m sure you do, because I have yet to meet somebody who doesn’t want their own business.
Unfortunately, one of the biggest challenge that entrepreneurs have to face is finding the money to start their venture.
Time and again, the lack of business capital has become one of the primary reasons why startups fail to take off or worse, close down.
Today, we’ll look into the three general ways how entrepreneurs raise business capital, and briefly discuss the pros and cons of each funding option.
Hopefully, this will help you when time comes that you have to decide how to raise funds for your very first business.
Bootstrapping simply means using your own resources to fund your venture. Money will primarily come from your own savings, from the sale of some of your assets, or from liquidating personal investments.
Advantages of Bootstrapping
- You will not owe money from anyone.
- You will have total control of the business.
- All profit from the business is yours.
- You will learn how to be versatile and resourceful with your money.
Disadvantages of Bootstrapping
- It could take a long time before you’ll have enough business capital.
- All business losses will be at your own account.
Getting a Business Loan
Using other people’s money (OPM) is an option that many consider when looking for business capital. The loan can be taken from a bank, a lending company, or just simply through borrowing money from family and friends.
Advantages of Getting a Business Loan
- It’s faster to raise business capital this way.
- You still have full control of the business.
- Staggered loan payments allows you to leverage current cashflow.
Disadvantages of Getting a Business Loan
- It could be difficult to get approved for one.
- You will have debt payments as an additional business expense.
- You could face serious consequences if you fail to pay on time.
- Creditors could require collateral which you will lose if the business fails.
Partnering with a Venture Capitalist
Getting seed funding from an angel investor or a venture capitalist is more common than you think. If fact, most successful tech companies started this way.
Advantages of Working with a VC
- You’re most likely to get the exact business capital you need.
- Most VC’s can become mentors and you’ll get free business consultation.
- VC’s have a business network which your business could leverage on.
- VC’s will have vested interest in the success of the company. Thus, getting growth funding is relatively easier.
Disadvantages of Working with a VC
- While you theoretically don’t owe money to anyone, your business profits are now shared with your VC. In some cases, the VC will request to have the majority share of the company.
- Most VC’s will want to have participation in key business decisions.
- Legal paperwork and business accounting can become tedious and complicated.
- At worst, the VC can pull out funding and leave you out on the cold.
Which One Is The Best Choice?
There is no best choice among the three. It all depends on the nature, and more importantly, in your vision for the business.
I’ve personally tried all three, and have found the most business success in working with a venture capitalist.
My personal advise for beginners, bootstrap a small business first so that you’ll learn how the world of entrepreneurship works. Then apply for a business loan or look for a venture capitalist when it’s time to expand or grow your business.
But for those who already have sophisticated knowledge about starting and running a business, leveraging on other people’s money through a business loan or an angel investor is the best route to go.
- 10 Ways To Raise Capital For Your Business (a two-part post)
- How Much Business Startup Capital Do You Really Need?
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10 Ways To Raise Capital For Your Business Part 2
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10 Ways To Raise Capital For Your Business Part 1
How do you raise the start-up capital for your business? This question is probably the biggest problem faced by those who want to become an entrepreneur. Personally, I’ve heard friends say that if only they had enough capital, they would really quit their jobs and put up their own businesses. Admittedly, I was also burdened by this...