What is capital?
Let’s keep it simple and straightforward: 1. You have a great business idea that you would like to put into action or 2. You are already running a business that you would like to grow. Either way, you need money to buy additional resources that will generate more money into your business. That’s the difference between money and capital; the latter (capital) is used to create wealth thanks to investing, while money is for short-term consumption.
You need money to buy additional resources – that will generate more money into your business.
How do I get this money?
The phrase “How to get money to start a business” results in 483 000 000 hits. Obviously there are almost as many available answers. Let’s look into some of the most acknowledged and common ones, basically where you go to get capital for your business.
Most founders put some own capital into their new-born business to get it all going. It might either be your savings or the incomes from your regular 9-5 job. Maybe you can bookmark some hours each week for a project on the side to get extra cash for your business?
2. Friends and family
As good and easy as this option might sound – we wouldn’t recommend it. A business is a business and it always involves a certain amount of risk. Maybe that great idea you had turned out to be a bit far off from reality. Having had a close friend to back you up might put you in an extremely uncomfortable situation if, God forbid, your business idea doesn’t work out and you end up going bankrupt.
3. Venture capitalists
What is venture capital? Venture capital (VC) is a form of private equity that’s provided at an early stage to an emerging firm with high growth potential. You’ve probably come across the VC abbreviation more than once in a Wall Street related film.
VC is high risk capital that supports businesses with the hope of high return on investment. What’s the downside? Venture capitalists want their invested money to grow quickly in order to make as much money as possible when selling the company (usually through an initial public offering).
BUT – will a venture capitalist care about your small business? The truth is, probably not.
4. Angel investors
You could call an angel investor the opposite of a venture capitalist. It’s a wealthy person that’s investing more in you as a person rather than the viability of your business. Thus they use their own money instead of a venture capitalist who is usually managing money from other investors or funds. What does the angel investor gets in return? Normally ownership equity or convertible bonds.
5. Bank funding
Small business loans from banks is a traditional way of getting money for your start-up and/or planned company. The bank will carefully review your personal credit score, your time in business, your business plan and much more to estimate how likely it is that your business will actually generate revenues – and make it possible for you to pay back the loan. You’ll gradually pay back the loan to the bank, with interest. Interest is basically the charge for borrowing the money that is usually set at an annual percentage rate.
One of the main advantages of taking a bank loan? In contrast to getting capital from investors you’re not giving away a piece of your business.
Crowdfunding is about raising small amounts of money from a large number of people usually on the Internet. What do the “donors” get out of it, you may ask. Well, everything from gifts, to free samples as well as advance products. Equity-based crowdfunding has become an alternative for start-ups who don’t want to be dependent on venture capital investors.
7. Cash advance
Often an alternative for companies with some time in business, a cash advance is basically a short-term loan from a bank or another type of lender. The payback of this depends on credit cards volumes. But it’s also important to point out that a cash advance isn’t a loan per se, rather than you selling future credit card sales.
Cash advances have many advantages over traditional loans.
– As a business, as you begin, you grow and you develop – what’s important is cash flow, says Timothy Bosworth, founder of Hoxton North in Harrogate.
I love cash advance options that are customised to your specific business where repayments are made seamlessly and simultaneously.
Tim considers traditional bank loans not being up to date.
– It’s always ‘give me your business plan, give me your forecast’ – but today’s business is more fluid and it has changed. And the biggest change is technology, that’s why I love cash advance options that are customised to your specific business where repayments are made seamlessly and simultaneously.”