Obtaining financial capital for a new business from traditional sources may prove challenging. Some of the guidelines that most lending institutions employ may not apply to a business start up because the business usually lacks an operating history. The different types of business start up funding that are available for a new business may have tougher restrictions to qualify. Most business start up funding options typically fit two types of business financing. Debt financing is a business start up funding option that typically requires repayment even if the business fails. With equity financing, investors provide funding in exchange for ownership stake in the business.
The different types of business start up funding may come from several different sources. An unsecured loan is a type of debt financing that does not require collateral — a form of security against default or loss — for approval. With a secured loan, the lender typically requests collateral to use for possible payment default or business failure. Another source for business start up funding is venture capital, an equity-financing product available to business owners unable to secure traditional business financing.
Absent a financial performance history and tangible assets, a new business owner may have to provide a personal guarantee to receive an unsecured loan. A perceived disadvantage to obtaining an unsecured loan with a personal guarantee is the risk to the business owner’s personal assets. The unsecured loan has to be repaid even if the business fails. This could jeopardize the personal assets of the owner if the business is unsuccessful.
A business owner may apply for a secured loan at a commercial finance institution that specializes in providing loan products to businesses. This type of business start up funding is typically granted for capital asset purchases such as office equipment. Secured loans generally require some type of collateral to receive the loan.
Venture capital is a business start up funding source that provides the capital lacking with most new businesses. A new business might receive venture capital financing despite its brief operating history. Most venture capital firms look for new ventures in which to invest. The general expectation is to receive a return on the investment rather than payment for a debt loan.
There are a few trade-offs for using a venture capital funding source. Most investors may have an active voice in the daily operations of a new business. Because of the equity share most venture capital sources hold, a new business owner may not have free reigns to develop the business. Business decisions usually need the approval of the investors before implementation.
