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What Are the Different Types of Start-Up Business Financing?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 07 November 2016
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Start-up business financing is the way that a business that is just getting started achieves the funds necessary to begin operations. There are multiple sources to which the business owners may turn if they don't have the capital to fund the business themselves. If it is a small business, start-up business financing may come in the form of money provided by friends and family. For larger businesses, the owners may look to outside financing from banks or venture capitalists, which may get them the funding they desire but also cause them to relinquish some control.

The idea of starting a business and making lots of money is shared by many people across the world. Unfortunately, relatively few people have the capital at their disposal to make those dreams into reality all by themselves. Business owners need to have the funds for business lodging, product launch, employees' salary, marketing efforts, and myriad other operational necessities. As a result, they often have to seek out some sort of start-up business financing to get their business off the ground.

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Depending on the size of the business, some business owners may be able to receive start-up business financing from people they know and trust, such as friends and family. Often called angel funding, this type of funding allows the owners to get enough capital in the seed round, which is the initial round of funding for a business, to begin operations. The people that provide the financing might do it just to help or they might be rewarded with some sort of equity in the business.

When funding from close relations is not enough, start-up business financing may be obtained from outside sources. Banks offer business loans for this very purpose. Obviously, the bank looks at loans as investments, and they require interest payments from borrowers to atone for the risk of giving out the loan. The amount of interest owed on business loans depends on whether the loan is secured by some sort of collateral from the owner or not. Unsecured loans generally carry high interest rates.

There are also groups of people whose sole business is to provide start-up business financing. These people, known as venture capitalists, scout out promising business ideas and connect with the owners of those business ideas to provide funding. Venture capitalists generally demand some share of ownership in the businesses in which they invest, and they also might have some authority on decisions made by these businesses. For that reason, using venture capital is a trade-off for business owners, who can potentially lose control of the business they began.

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