From Tim’s Desk: Sources of Capital
It’s no secret that one of the keys to successfully running a business is to line up sources of working capital. Working capital could be necessary for a variety of reasons, whether it’s to purchase equipment needed to start a new business or a new line within your business, purchase inventory needed to handle growing demand for your product, or even to buy out a competitor. Sources of capital come in many different shapes and sizes, and which one may be right for you will depend on your situation and your needs. The main sources of capital that we’ll explore are:
- Personal – this includes dipping into your life savings and/or borrowing from friends or family members. Starting off on your own is often the only option for many entrepreneurs since no one else is willing to share your risk until you establish yourself. Borrowing from friends and family is a double-edged sword as it can provide flexible terms that you won’t get from a bank but can also add unwanted tension to your personal life.
- Financial Institutions – borrowing from a bank can come in the form of a term loan or a line of credit. The benefit of this financing source is that you maintain 100% ownership and control of your company. This is assuming, however, that you’re able to meet the bank’s credit requirements to qualify for the financing. Particularly for a younger startup, receiving financing from a bank will often require some level of a business plan.
- External Investors – this category includes angel investors, venture capitalists, and possibly local economic development agencies (such as 3Core in our tri-county area). The terms of these capital arrangements vary depending on the situation, but getting money from investors usually means that you have to give up an ownership percentage in your company. Like a bank, external investors will also want to see a business plan before they are willing to put any money into your company.
Over the following weeks and months, we’ll be diving further into each of these sources of capital and taking a closer look at the pros and cons of each, as well as discussing when the right time may be to approach an outside investor. Stay tuned!
About the Author
Tim Peters is a consultant with Morrison, working primarily in our Business & Accounting Advisory practice. To get in touch with Tim, please find contact information for Morrison here.