General Sources of Funding
Where an entrepreneur is in a position where they either need money for starting a business or need money to extend the life of a business, there are a variety of sources of funding for such activities. Apart from business equity, the entrepreneur can finance the whole project on his or her own. This means that they enjoy all the profits but they take all the risks. Because of the high level of risk involved, some business owners are reluctant to go down this route.
There is another alternative whereby they borrow from friends and family based on good will and familiarity. This can either be done on the basis of one individual or a group of individuals coming together to help out a friend. The problem with this solution is that it is not entirely formal. For example it is difficult to make a credit check on your brother in law if he wants to get funding from you for a business.
You might end up getting into trouble with your partner for this kind of intrusive questioning. Because of the informality of the arrangements things are more likely to go wrong than if you approach a professional outfit to try and get a business loan. If things fail, you might end up losing very precious family relationships.
External professional lenders
Other business people will turn to the bank and get a mortgage or a bank loan, with some opting for business cash advance in urgent need. This has the disadvantage of having to submit to stringent lending criteria and giving up your assets as collateral. Of course if you are unable to pay for whatever reason, you are likely to end up losing your collateral. Although the relative might have some sympathy with your sob stories about why you cannot pay, the bank manager will take a totally different attitude and might refuse to help you in any way.
Further down the line the business can look to other external assistance such as venture capitalists or angel investors. This might appear to be a very unique situation whereby you sell some of your business equity for a given period of time in exchange for investment at this moment in time. Private equity firms are also another group of organizations which participate in this kind of business. The obvious risk is that you hand over ownership to someone else who may not understand your company or your employees.
Getting the mix right
The ideal solution is not to rely on just one source of funding but to mix them up in such a way that you do not put yourself at risk but can also gain as much investment as possible. You as the business owner will have in mind the rate at which you are prepared to risk your business equity in order to achieve the short term goal of obtaining investment.
If you are borrowing from friends and family you will also know the limits to which they can accept to lend you the money and what the payment terms will be. The choice is yours and some people are even advised to make sure that they have a combination of sources of funding.