Types and Sources of Capital for Start-ups

Financing is needed to start a business and ramp it up to pro fi ability. There are several sources to consider when looking for start-up . But first you need to consider how much money you need and when you will need it.The financial needs of a business will vary according to the type and size of the business. For example, processing businesses are usually capital intensive, requiring large amounts of capital. 

Debt and equity are the two major sources . Government grants  aspects of a business may be an option.

Also, incentives may be available to locate in certain communities and / or encourage activities in particular industries.

Equity financing

1. Equity  means exchanging a portion of the ownership of the business for a financial investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company's pro fi ts. Equity involves a permanent investment in a company and is not repaid by the company at a later date.
2. The investment should be properly defined in a formally created business entity. An equity stake in a company can be in the form of membership units, as in the case of a limited liability company or in the form of common or preferred stock as in a corporation.
3. Companies may establish different classes of stock to control voting rights among shareholders. Similarly, companies may use different types of preferred stock. For example, common stockholders can vote while preferred stockholders generally cannot. But common stockholders are last in line for the company's assets in case of default or bankruptcy. Preferred stockholders receive a predetermined dividend before common stockholders receive a dividend.
4. The first place to look for money is your own savings or equity. Personal resources can include pro fi t-sharing or early retirement funds, real estate equity loans, or cash value insurance policies.
5. Life insurance policies - A standard feature of many life insurance policies is the owner’s ability to borrow against the cash value of the policy. This does not include term insurance because it has no cash value. The money can be used for business needs. It takes about two years for a policy to accumulate suf fi cient cash value for borrowing. You may borrow most of the cash value of the policy. The loan will reduce the face value of the policy and, in the case of death, the loan has to be repaid before the bene fi ciaries of the policy receive any payment.
6. Home equity loans - A home equity loan is a loan backed by the value of the equity in your home. If your home is paid for, it can be used to generate funds from the entire value of your home. If your home has an existing mortgage, it can provide funds on the difference between the value of the house and the unpaid mortgage amount. For example, if your house is worth $ 150,000 with an outstanding mortgage of $ 60,000, you have $ 90,000 in equity you can use as collateral for a home equity loan or line of credit. Some home equity loans are set up as a revolving credit line from which you can draw the amount needed at any time. The interest on a home equity loan is tax deductible.

Friends and Relatives

1. Founders of a start-up business may look to private fi sources such as parents or friends. It may be in the form of equity fi  in which the friend or relative receives an ownership interest in the business.
2. However, these investments should be made with the same formality that would be used with outside investors.

Venture capital

1. Venture capital refers to fi g that comes from companies or individuals in the business of investing in young, privately held businesses. They provide capital to young businesses in exchange for an ownership share of the business. Venture capital usually don't want to participate in the initial  of a business unless the company has management with a proven track record. Generally, they prefer to invest in companies that have received s equity investments from the founders and are already pro fi table.
2. They also prefer businesses that have a competitive advantage or a strong value proposition in the form of a patent, a proven demand for the product, or a very special (and protectable) idea. Venture capital investors often take a hands-on approach to their investments, requiring representation on the board of directors and sometimes the hiring of managers. Venture capital investors can provide valuable guidance and business advice. However, they are looking for substantial returns on their investments and their objectives may be at cross purposes with those of the founders. They are often focused on short-term gain.
3. Venture capitals are usually focused on creating an investment portfolio of businesses with high growth potential resulting in high rates of returns.