The first few years of entrepreneurship can bring up a lot of new words that seem complicated and overwhelming, and that’s before you even get to the tax forms (1089, 1040 ,1120, Schedule C, what?).
To help with that confusion, we’ve come up with some of the most common funding terms you’ll hear in your first few years of business and compiled them in our Funding-tionary!
Self-Funded Investment – This is the owner’s own money put into a business to provide working capital, often funds that are continuously reinvested to spur growth. Depending on the margin of profit, this probably means low operating costs and little income for entrepreneur. For more on bootstrapping as a means of funding, read our other post.
Friends & Family and Crowdfunding – An ideal but less feasible solution, many entrepreneurs dream of having friends, family and strangers gift them with money. There is typically no legal agreement in place for repayment, but some friends and family may ask to be repaid (and possibly with interest), or crowdfunding platforms may encourage you give some type of reward to donors as a thank you.
Equity Investment – Also known as seed funding, buying equity of a business gives the investor a stake in ownership of the company and a percentage of the profits. There is no interest paid in exchange for the funds, but continuous profits are taken out of the business’s earnings and major decisions must be agreed upon by all stakeholders. The stakeholders have a potential for greater profits, as well as unprotected loss if the company goes under.
Angel Investor – This is someone who invests early on in a startup, providing funds for a company that has very little history or profits, but shows promise in the business model and product or service. In exchange for this capital, the investor receives convertible debt (future stock or equity), interest on the investment or part ownership.
Venture Capital – Similar to an angel investor, only instead of being an individual, a VC is a company investing in startup business. This type of investing holds the same risks for investors as the others where if the startup invested in goes bankrupt, the startup does not have to pay back its investors. VCs can also provide an additional round of funding with more money, but they’ll be able to dilute your shares, charge interest, and push your business to expand.
Alternative Lending – This is where FundKite comes into the business financing sector! FundKite and other alternative lenders provide working capital for small to large businesses in a variety of industries. This business to business alternative lending is a popular option for business owners because the application process and receiving of funds is much simpler, faster and easier to qualify for than going through banks. Funds are given to a business in exchange for a purchase of future receivables, and this is paid back over a period of time.
Loans – Banks, credit unions, SBA and government institutions are the most commonly thought of loan providers. Commercial loans often involve a lengthier application process, heavy credit score checks, government mandated strict requirements of business qualifications, some form of collateral and high interest rates. Many businesses prefer long term loans, but do not meet the requirements nor have the time to wait for funds.
Credit Cards – Some businesses choose to obtain their funding through several open credit cards. Having one card could be beneficial; the owner keeps all equity, rewards and points can be redeemed, good business credit is built, and expenses are easily tracked. However, maxing out multiple credit cards is a risky source of funding due to the harsh penalties if payments cannot be made, high interest rates, and unlimited liability. Additionally, spend limits on credit cards can be relatively low for what a business needs. Some businesses can make it work, but it’s a high risk option for obtaining working capital.
Think alternative lending is right for you? Click here to apply for funding with FundKite!