3 Types of E-Commerce Start-Up Capital
Angel Investors, Commercial Bank Loans, or Venture Capital Companies
Aug 6, 2009
The U.S. Census Bureau's 2002 Survey of Business Owners - Characteristics of Business studied small businesses operating within the United States. Only 28% of respondents reported that they had started their business with no capital. More than 60% were self-financed with funding from family, friends, or their own savings.
Other popular sources of funding among those in need of start-up capital included bank loans (11%) and credit card debt (9%).
Those seeking capital to finance a new e-commerce business have two other options, in addition to bank financing: venture capital companies and angel investors.
Business Line of Credit or Commercial Bank Loans
Many entrepreneurs turn to their trusted banker for financing when planning a new business. However, securing a bank loan or line of credit can be challenging for a new business owner.
Banks tend to dislike risk. They are generally more supportive of established businesses, or those past the planning stage and into development. Financing may depend on the entrepreneur's personal credit, and loans may require the security of assets. Repayment terms are generally inflexible, with set payments due whether or not the business is thriving.
For these reasons, banks are not often the first choice for start-up capital financing. However, if a bank loan or line of credit is the only financing available, prepare a professional e-commerce business plan to increase the likelihood of funding approval.
The Pros and Cons of Using Venture Capital Companies for Start-Up Capital
Venture capitalists aim to make a profit by investing in new companies they believe to have exceptional potential. Venture capital companies are groups of business investors who pool their resources to reduce the risk inherent to small business investment.
Securing funding from a venture capital company requires a solid business plan, demonstrated ability to grow, and a high level of professionalism. These investors want to have a say in important company decisions and may even become involved with the day-to-day operation of the business. The level of involvement expected by both parties must be clearly stated in writing before a financing agreement is finalized.
Venture capital companies may provide a much-needed infusion of start-up capital and the funds needed to grow an online business. However, entrepreneurs unwilling to give up sole decision-making power may not find this the most attractive financing option.
Financing a New Business with E-Commerce Angel Investors
Angel investors work in different ways. Some are content to provide start-up funding and take a back seat. Others like to be involved, whether as a mostly silent partner, consultant, or active participant in business decision making.
Generally, angel investors are talented business people who have the financial means to invest in new businesses. Theodore F. di Stefano coached entrepreneurs on the best ways to approach angel investors in his October 8, 2004, E-Commerce Times article, Searching for Capital: Small-Cap Options. In addition to a professional business plan, di Stefano recommends that entrepreneurs come prepared with the following when meeting with an angel investor:
- the amount of start-up capital required
- the level of control desired
- a realistic budget
Secure Start-Up Capital From the Best Source with Good Advice
Always consult with an accountant and attorney before securing capital for a new business. The needs and limitations of a new business are complex. Reduce the risk of getting the wrong type of financing or losing control of the business by seeking professional advice before signing any contracts.
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