Wednesday, January 25, 2012

The Top 3 Funding Sources For New Entrepreneurs

entrepreneurs funding
Entrepreneurs primarily care about two things; cash and customers. The more of either, the better. For those looking to become entrepreneurs or who are new to "the great game" as I like to call it, understanding where entrepreneurs typically find their initial capital is important. This will keep them from spinning their wheels chasing down funding they have absolutely no chance of getting. Equally important is knowing where not to look. Below are the top 3 funding sources for new entrepreneurs.

1. Personal Savings

If you are thinking about entrepreneurship you had better have a decent amount of savings on hand to support your business and yourself. When starting a venture it is highly unlikely you will get funding from anyone other than yourself initially. Banks will not give you a second thought if you have not been in business for at least 2 to 3 years. Even if a bank wanted to give you money at this stage you really should not take it. Huh? Yep, you read that correctly. I will address this in detail in a later post titled "The Top 3 Reason Why New Entrepreneurs Should Avoid Banks".

2. Credit Cards

Some of today's most successful companies used personal credit cards as an early funding source. You will be hard pressed to find an entrepreneur who did not used their own credit cards to purchase supplies and inventory. If you do not have a credit card with a sizable limit, you should definitely secure one prior to starting your business. If you execute properly, cash will begin to flow into your business from sales. You can then use this cash as an additional funding source by reinvesting into your business. That is why in the early stages it is all about selling.

3. Friends and Family

This is a very popular option with entrepreneurs but you must exercise extreme caution here. The rule of thumb here is you do not take money from a family member who cannot afford to lose it. Do not ask your 55 year old Uncle Joey to take money from his retirement account. Not only does it make holiday dinners extremely unpleasant, but it will likely put your relative in jeopardy. We simply cannot ignore the high failure rate of new businesses. 

A good option with friends and family is to collect small amounts from several friends and family instead of trying to identify one rich uncle. Nowadays this is even easier through crowd funding sites such as ProFounder. Through the ProFounder website, friends and family can fund your venture without either of you having to worry about the hassle of paperwork. ProFounder handles this on the back end. ProFounder also has tools for creating a pitch, term sheets and compliance calculators. This also adds a great deal of credibility to the transaction. Make sure you check it out.

A Word About Banks

Stay away from them. Period. In the early stages of your venture a bank is the last place you want to spend your time. The process is time consuming and tedious. In today's climate your chances of securing a bank loan are slim to zero unless you have excellent credit, significant collateral and a 2 to 3 year successful track record. Even if you meet this criteria, there still is no guarantee. I have secured business loans in the past and I am very familiar with the process. A new entrepreneur's time should be spent marketing and selling, not chasing down banks. 

In an upcoming post I explain exactly why going after bank loans is a terrible idea for the new startup. Be sure to come back in a couple of days to catch the post. Better yet, just subscribe to this blog to the right of this post!

And don't forget to tweet this article!

Godspeed and I look forward to seeing you in The Players Lounge

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