Every business needs capital, to operate, to grow or to take advantage of new opportunities and ideas. As a fellow entrepreneur once put it, every business must eventually be a customer funded business. The point of a business, over the long term, is to meet all its internal capital needs and throw off a profit. BUT, sometimes a business does not lend itself to bootstrapping in the early stages or a business needs an extra boost of capital to capture rapid growth opportunities. Determining the right type of capital for the business and then finding sources of that capital is a challenge for every entrepreneur, whether new or experienced.
If your business needs outside capital for either product or service development and launch or rapid expansion, there are only a limited number of ways to bring capital into your business. Potential sources of capital fall into one of these five categories.
- Investment Capital – selling equity for a capital infusion which includes angel capital, venture capital and crowdfunding for equity.
- Business Loan – including Bank or Micro- loans, non-traditional loans such as factoring, venture debt, friends and family loans
- Pre-selling product (crowdfunding for “stuff”).
- Grant / Contract Funding – programs such as the federal SBIR program or state programs, typically for deep research or socially desirable purposes.
- Personal capital or friends and family capital (your cash or FF cash).
There are many attempts to convince entrepreneurs that there is a magic bullet or some “novel” type of capital. Don’t let new names confuse you! Be aware of the type of capital that you are accepting can cause a lot of damage. So make sure you understand – what type of capital is best suited to your business and then make sure you really understand what you’re getting!