6.4 Financing a New Business

Entrepreneurs often underestimate the amount of money they will need to raise.  Where will the money come from?

Sources of Funds

• Personal resources – An entrepreneur will first tap into the personal money.
  • Personal credit cards – this is a common way to start out but it is terribly expensive.  Credit cards charge high interest on unpaid balances.
  • Mortgage – A first or second mortgage is another popular way to obtain start up money.  Mortgages have lower interest than credit cards but now the entrepreneur is putting their home at risk.
• Friends and family – The entrepreneur may seek loans or equity partners from friends and family.  It can often be a source of family problems if the business has trouble.
• Venture Capitalists – VCs are persons or businesses whose purpose is to invest in startups.  VCs may invest large sums of money in exchange for equity (stock).  VCs do not typically invest until the business has established itself to some degree.