There are many different ways of financing a new business, though not every option is viable for all companies. Most small businesses start up with what is often referred to as a friends and family financing round. This involves the owners of a new business borrowing money from their friends and family or using their own money. Certain businesses can also apply for bank loans or look to angel investors or venture capitalists. The availability of financing sources such as these can hinge on what type of business it is and whether the principals have extensive prior experience or contacts.
Financing a new business can be one of the most important parts of starting any new venture. Steps such as creating a business plan typically come first and can be just as important, but a business without solid financing in place can be doomed from the start. New business owners often have anywhere between six months and three years worth of income saved up to cover their own expenses during the start up period, but they often fund the initial business operations as well. This can present a very large strain on an individual's finances, so alternate means are often explored.
One source that new business owners often turn to consists of friends and family. This usually is a fairly early round in financing a new business, and relatively small amounts are often generated. Most business owners will try to raise enough money through friends and family to last until the company can become profitable or enter a growth phase and require subsequent funding rounds from angels or venture capitalists. Informal friends and family financing can include loans, though most businesses provide securities instead.
Bank loans can sometimes be used in financing a new business as well, particularly if the principals have good credit or assets. Most new businesses lack any assets to use as collateral, so the owners will often have to take on the financial liability. The advantage of financing a new business through bank loans, lines of credit, and other similar methods is that total control of the company is typically retained. Any other type of financing, including money from friends and family, can lead to some loss of control through the issuing of securities.
Angel investors and venture capitalists are sometimes available to new businesses, though they typically prefer to invest in established companies. Exceptions to this rule usually involve principals that have a strong track record in a particular industry. If an individual has started one or more successful business ventures that reached an initial public offering (IPO) or sale, angel investors and venture capitalists may show interest in subsequent startups.
