By: Catherine Li
What is startup capital? In order to start your new business, you need startup capital. This term refers to the money that a business owner requires to commence operations. This funding helps the business meet initial needs like office space, hiring and marketing resources, etc, . Raising startup capital is a crucial step in the process of starting a new enterprise. Read on to learn about startup capital, its purpose, and the sources it comes from.
What Is Startup Capital?
Startup capital refers to the money needed to create a business. It is also referred to as startup funding. It is intended to cover the necessary expenses incurred when an enterprise is born:
- Paying bills or utilities
- Employee wages
- Buying supplies and equipment
- Hiring professional services (lawyers or engineers)
- Office equipment and furnitures
- Renting office spaces
Of course, such costs vill vary depending on the type of business; its location, industry, and other factors.
How Startup Capital Works
A business owner needs some way to cover the costs of launching a new company and running that business before it starts generating revenue. Thus, startup capital is the money used for funding these operations. The funds may either come from the business owner’s personal funds, or another source.
- Notice: If a loan or an investment is the source of the startup capital, there will be expectations that the source of such funds should be repaid in the future.
For instance, a startup software company can receive funds from an investor, which is then used to mature their product, hire employees, rent offices, and then market towards buyers. In exchange, the investor is promised a stake in the business. As soon as the company starts increasing sales and generating revenue, both the business owner and the investor can focus on future growth and profit.
Types of Startup Capital
An entrepreneur may consider a few different sources when looking for startup capital to start their own business.
Owner’s Funds
Also known as bootstrapping, this method of receiving capital uses the entrepreneur or business owner’s personal funds to create the startup. The owner can use acquired savings to pay for expenses, or they might even take out a new mortgage on their private investments to raise the necessary cash.
Crowdfunding
A new business may ask for funding from a larger pool of funders, who help fund the startup and often require no equity or interest in exchange. This method is referred to as crowdfunding. It is a low-risk method to obtain capital for a business.
- Tip: Crowdfunding sources include equity crowdfunding sites, marketplace lending, and rewards-based crowdfunding.
Business Loan
An emerging business attempting to get up and running may finance its operations using a business loan. Many loans are available for such business ventures, like small business loans for startups. You may also be eligible to receive business credit from your suppliers or other sources.
Venture Capital
A promising startup may pursue venture capital funding. This is when a group of angel investors or venture capitalists pledge to invest in a business in return for equity - or a stake in the company - and a portion of profits in the future.
Does My Business Need Startup Capital?
To cover essential expenses such as marketing your product, you will need some kind of capital. Startup capital allows you to launch the business and fulfill those costs until you begin generating revenue.
In particular, startup capital is crucial for businesses that have higher operating expenses, or those that depend on specialized equipment.
Ways To Obtain Startup Capital
Investing in your business requires a concrete business plan; and a working budget that allocates capital for any startup costs. When you’ve projected what your startup expenses are, and have outlined a solid budget, you can begin searching for startup capital.
If you decided to pursue bootstrapping for your business, you would rely on your own personal funds and bank accounts for money.
Another possible way? Reach out to a bank for a small business loan, which are often backed by the Small Business Administration (SBA). To qualify for these loans. however, you may be required to prove your creditworthiness.
Or, you can rely on equity financing through angel investors to provide startup capital for your startup. You can also look within venture capital firms for investors. In return for this funding, be prepared to sign over equity in your company.
The equity promised - or the interest on a business loan - is the cost of capital (the price of receiving that funding.)
In Summary:
- Startup capital refers to the money needed for starting a new business
- Startup capital can come through different sources; it may come from the business owner, or it can be received through crowdfunding and other financing options
- A business can develop its operations and generate revenue with startup capital
- There may be a cost of capital, depending on the source of the startup capital, such as interest, which must be repaid down the line.
