You’ve figured out a unique market niche where there’s customer demand that no one is serving. You have the knowledge to succeed. You need capital for basic start-up expenses. Your first experience with business credit comes as you anticipate funding your venture.
If you’ve been bitten by the entrepreneurial bug, here are your five funding choices:
1. Personal money saved or accessible
2. Friends and family
3. Signature/personal loan
4. Small Business Administration or other business loan
5. Venture capital
The examples below illustrate typical start-up situations employing each of these options.
For 20 years, Marie managed properties for major corporations. When her daughter’s husband was transferred to a community adjacent to a major military base and it took them months to find a house to rent, Marie realized the area would be the perfect place to achieve her goal of owning rental properties. It turned out that houses were devalued and foreclosure rates were high in the neighborhoods where she wanted to purchase. She formed a company. Her excellent credit history and impressive record as a hands-on property manager enabled her to qualify for Small Business Administration funding from a local SBA Preferred Lender. She was able to purchase six rental houses during her first year in business and plans to acquire nine more in the second year. Cash flow is positive and she is fulfilling her professional dreams.
Dan and Alan worked together as engineers for one of the world’s largest microprocessor manufacturers. They had an idea for new software, which was of no interest to their employer. Their belief in their concept motivated them to refinance both of their homes to generate seed money. They used the money to develop a working prototype that could be shown to venture capitalists. This enabled them to secure the funding they needed to grow a company. It’s likely that venture capital funding would have been available for seed funding. However, as engineers with limited management experience, they elected to risk their own money to develop the software rather than pitching VCs with their innovative idea, which was much easier to fund after it could be demonstrated.
Hank always played music, picking up one instrument and then another and another. He formed bands in high school and college, playing in the area where he lived. He is a friendly person who was acquainted with everyone in the music business in his region. Not knowing what he wanted to do for a career, he majored in business. After college graduation, he was hired as a sales person for a musical instrument company. There was a need for a better music store in his city. As a young man with limited business experience, he developed a plan for his store, which he presented to family and friends to secure investors. His pitch convinced them to take a chance on him and he repaid all of the loans long before his investors expected, as he built a successful enterprise.
Andrew loved politics. As a teenager in Sacramento, he would seek out any opportunity to go to the capitol. During college, he started to volunteer as a lobbyist for organizations he believed in. When he graduated, he was hired to lobby for a boating organization. He learned the ropes of lobbying and, after a couple of years, formed his own small firm. At first, he was able to work alone out of a tiny unused space in a friend’s business. His overhead was minimal, which meant he could fund all of his start-up costs out of pocket. However, the business grew faster than he anticipated, which meant he had to secure office space and add employees more rapidly than he expected. Andrew had used a local credit union for his personal banking since he was a teenager. Everyone at the credit union knew him. When he asked for a personal loan to cover his business expansion costs, they processed it so fast that he was shocked and they told him to loan his business the money so he could repay it to himself as a business expense. This kept his business credit separate from his personal credit.
Charlotte is one of those people who always understood marketing, branding, public perceptions, image development. It seemed that it was encoded into her DNA. After college, she wrote for companies and worked in marketing departments, rising to the senior executive level. When she formed her own consulting practice, she did it from her home. Except for stationery and an additional phone line, she had no start-up costs. The business was launched with one client and she was able to bootstrap all the costs as she grew her firm.
Your start-up is likely to be a unique variation on one of these five. It is important to remember: Your enthusiasm for your venture combined with your knowledge of your business and your market will directly impact your ability to secure funding.
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