Sources of Funds for a Small Business Startup


No matter how small your new small business is but every business startup require capital to perform the business activities. There are various sources available for this kind of funds which is called seed funding. An individual may choose to start his new small business with his own money. But to do that, he need to be into serious habit of saving money. Even the investors and other lenders expect the person seeking a business loan or equity investment to make a personal financial contribution in that business. If he is not confident enough in his own business idea to risk making a personal investment then why would anyone else fund it?  An individual also use his personal assets such as real estate, vehicles, retirement accounts, stocks and bonds, or any other asset that can be mortgaged, sold for cash, or used for collateral. Banks are also offering loans on your home as collateral with minimum interest rates. 

Financing from Family and Friends (Love Money)

If an individual does not have his own money to start a new business then he can turn to the second most popular source of startup funds which is family and/or friends. This kind of startup financing is called personal loan. The main advantage of family/friend financing is flexibility. The lender can lend at a lower rate of return on his investment. He could wait longer to get his money back, may not require collateral and is also less likely to scrutinize your business plan to the same degree as a financial institution. The financing through personal loan from friends and family can also lead to jealousy and/or resentment among other family members.If the business does not succeed and you are unable to repay the loan(s), your relationship with the family/friend lender could be damaged beyond repair. Family or friends who lend for your business venture may feel that they have a right to make or participate in your business decisions. To avoid these, a business owner need to properly documentthe loan agreements such as repayment terms, interest rates and whether the lender has authority to make the decisions regarding the operation of the business. 

Banks and Other Financial Institutions

After the self-financing and loans from family and friends, the third most popular source of small business startup funds is the financial institutions, such as banks and financial institutions. These financial institutions are reluctant to lend to small businesses. To improve his chances with these institutions, a business owner need to have a solid business plan,a good credit rating and collateral and a proven track record with other business ventures.

Other Sources of Funding for Start-up Money

The Government of India has set up a Venture Capital Assistance Fund under which financial assistance is provided to farmers, producer groups and self-help groups for setting up agri-business in agri-export zones. Another fund floated by the Ministry of Micro, Small and Medium Enterprises and headed by Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). Small Business loans up to Rs.50 Lakhs are provided under this scheme. 

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