When you’re earning an MBA—or other master’s or bachelor’s degree in business or management—your program of study will probably include coursework in various aspects of finance. And while financial expertise is a plus for any business professional, if you’re planning a new business endeavor, understanding the essentials of start-up capital is a fundamental requirement for success.
Start-up capital, also referred to as seed money, can be used for any number of new business functions, such as setting up your office, purchasing equipment or products, obtaining licenses or permits, or hiring employees. Oftentimes, start-up capital is funded in stages as the company evolves. It can come from a number of sources, all of which have advantages and disadvantages. Here are a few:
Source 1: Self-Financing
The number one source of start-up capital is the owner’s personal financial assets.1 An easy way to start is with a simple inventory of your assets and credit options.
| Advantages | Disadvantages |
|---|---|
| It’s your career and your future. Self-funding allows you to maintain control of your business decisions. | Risk of personal debt or even bankruptcy. |
| The rewards will be yours and not the bank’s. | Underfunding can mean lost sales if orders are too big for you to fill with your own money. |
| Because it’s your money, you may run a better business and make smarter decisions. | |
Source 2: Friends and Family
When entrepreneurs struggle with credit issues or don’t have assets they can use to fund their business, turning to friends and family members is a popular choice for start-up capital. If you choose this option, make sure you treat it as you would any other business arrangement, and establish all terms in writing.
| Advantages | Disadvantages |
|---|---|
| You’ll have flexibility and low interest rates. | Risk of personal debt or even bankruptcy. |
| The loan approval process is usually easier than with banks. | Underfunding can mean lost sales if orders are too big for you to fill with your own money. |
| | Feelings and tensions can run high when the business isn’t doing well. |
Source 3: Business Loans
Business loans are a popular choice of funding among start-up companies, though they are not always easy to secure. As a starting point, use online resources to compare bank rates and learn about different loan terms.
| Advantages | Disadvantages |
|---|---|
| Personal financial risks are eliminated when your business borrows funds—as long as you’ve structured your business entity properly. | Banks may not grant 100% of the requested loan amount, so you may need to explore multiple options. |
| By paying your loan on time, you’ll build a good credit history for your company. | The application process can be lengthy and intimidating, though you can position yourself as strongly as possible by sharing a well-crafted business plan, industry credentials, and any business or finance degree programs you may have started or completed, particularly at the graduate level. |
| The IRS allows you to deduct a number of expenses, including interest paid on business loans. | |
Source 4: Angel Investors
“Angel” investors are individuals looking to put their own money to work for them by investing in a start-up that may provide a higher rate of return and tax benefits not available through other forms of investment.
| Advantages | Disadvantages |
|---|---|
| This initial funding can position your company for future investments by larger venture capital firms. | Angel investors expect a very high rate of return—sometimes 25% or more. |
| Funds may be provided all at once, without a great deal of waiting time. | Because angel investors are risk averse, follow-up investments are rare. |
| Angel investors are often entrepreneurs themselves and may be able to provide you with a higher degree of management advice and insight than other sources—after all, your success becomes their success. | |
Source 5: Venture Capital (VC)
VC firms generally have the most money to invest, though they represent the smallest number of start-up capital investors.1
| Advantages | Disadvantages |
|---|---|
| Being chosen as a portfolio company by a VC firm is an excellent indication of your company’s potential. | Investment opportunities are not simply start-up funding from a VC perspective; firms take a greater degree of business ownership, so you may become the minority in your own company. |
| VC firms have strong networking connections that can help you boost your business. | It can take up to a year for a VC firm to decide if they want to invest in your business. |
| VC firms may provide extra support in the form of accounting or legal assistance. | |
Regardless of which source you choose to finance your start-up, it’s important to take a long-term perspective and become as financially savvy as possible. Continuing your education with an online Master of Business Administration (MBA) degree, or similar online graduate degree program can be a great way to stay on top of the latest trends in business while building the types of professional credentials that lenders want to see.
1Source: www.entrepreneur.com/article/241331
*Entrepreneur.com, Start Up Funding in 2014 (Infographic), on the Internet at www.entrepreneur.com/article/241331.
Other references for this article:
BusinessBlogs, Advantages and Disadvantages of Taking Small Business Loans from Banks, on the Internet at www.businessblogshub.com/2010/10/advantages-and-disadvantages-of-taking-small-business-loans-from-banks.
Alexander Huls, The Pros and Cons of Using Personal Funds to Run Your Business, The Hartford, on the Internet at http://sba.thehartford.com/finance/the-pros-and-cons-of-using-personal-funds-to-run-your-business.