Starting a new business isn't cheap. Even on the internet, I've seen more than a few entrepreneurs experience surprise when they start to realize how much it costs to get a venture off the ground.

Making sure your new business is well-capitalized is an important part of achieving success. For that reason, it's important to ask the question: how much do I really need and where am I going to get it?

When it comes to the latter part of that question, here are the most common methods for financing a new business, along with the advantages and disadvantages of each.

Savings or retirement. If you have money in the bank (or a retirement account) and it's enough to finance the startup of your new business, raiding it is a quick and easy way to obtain startup capital.

Advantages: Being able to finance the startup of your own business means you don't have to spend time raising money and it also means that you don't have to give up any equity -- two very desirable things.

Disadvantages: Your savings and retirement accounts provide a personal safety net and risking them is not for the faint of heart. Chances are you don't have an unlimited amount of cash, so it's important to realistically assess where you can get with what you do have. It's also important to consider any tax implications of cashing out retirement accounts early as in some countries you may have a lot less money than you expect after you pay the taxman.

Income. It may not be easy to do but some entrepreneurs don't quit their day jobs when building a new business. They stay gainfully employed, using their discretionary income to finance the business. Work is typically done nights and weekends.

Advantages:
Security. Most new businesses don't take off overnight and leaving behind a decent job to start one is very risky, especially if you don't have the financial wherewithal to keep the electricity turned on and water running for at least a year. By staying employed, you can take things slowly and don't have to worry about running out of cash. If your new business takes off, you can quit your job without hesitation; if it doesn't, you've minimized your risk.

Disadvantages: Building a business is hard to do when you're limited to working nights and weekends. After all, somebody could be working full-time on something similar. And depending on how much discretionary income you have, your income may or may not provide enough cash to realistically get you where you need to go.

Debt.
For entrepreneurs with access to credit or a significant asset or two, debt may be an appealing option. You've probably heard stories of entrepreneurs who financed wildly successful businesses with credit cards, a home equity loan or some other form of debt.

Advantages: As with using savings or retirement to finance a new business, debt enables entrepreneurs to skip the fundraising process and to retain full equity early on. And in some countries, there are loan programs with favorable terms designed specifically for the startup of new businesses.

Disadvantages: It's debt. If things don't go as planned, you could find yourself in a world of hurt (bankruptcy, the loss of collateral, etc.).

Friends and family. When looking to raise money for a new business, friends and family are often the most likely people willing to provide it.

Advantages: For most, raising money from friends and family is far easier than raising it from professional investors. And unlike professional investors, your friends and family will likely be happy to take a passive role in their investment.

Disadvantages:
Unless you have a rich uncle, the amount you can raise from friends and family is usually limited. It's also very important to tread carefully when doing business with friends and family for obvious reasons.

Professional investors. Behind many of the most successful startups you'll find angels investors and venture capitalists -- professional investors that specialize in attempting to find the next big thing.

Advantages:
For startups that need a lot of capital, angels and VCs may be the only ones who have it. The best of them can also bring experience, industry connections and professional assistance (management recruiting, referrals to trusted service providers, etc).

Disadvantages: Equity financing may seem cheap but it's the most expensive form of financing available in the long-run. Because you're dealing with professionals, investment terms are often tough. Additionally, raising money from angels and VCs can be extremely difficult and time consuming, especially if you're a first-time founder and/or lack connections.

What's the best option for you? There's no easy answer. Only after an honest financial assessment and proper business planning should one make a decision. The good news: tedious number crunching and business plan writing will not only help you choose the best financing option, it will help you increase your chances of success.

Photo credit: greggoconnell via Flickr.

Patricio Robles

Published 8 September, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

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Jamie Riddell

An important source of income is prepayment. If you have a business that can incentivise customers or clients to prepay some or all of the work/goods/services then you will be able to generate cash flow at a quicker rate than normal which reduces the need for capital injection of any sort. We launched Cheeze with a £5000 overdraft and funded the rest of the growth through incentivised prepayment which enabled us to grow profitably and maintain complete ownership of the agency with no debt.

over 8 years ago

Patricio Robles

Patricio Robles, Tech Reporter at Econsultancy

Jamie,

That's a good one worth adding to the list. Obviously, pre-payment probably works best for service-oriented businesses.

over 8 years ago

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Mick Dickinson

The question asked by many new entrepreneurs is "Can I get a grant?". The answer is almost always "No".

Usually, they’re only available to specific types of people or businesses, often in economically disadvantaged places. Even where they are available, the application procedure can be long and match funding can be required. For further information about grants, speak to your local Enterprise Agency or Business Link. More good advice here

over 8 years ago

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over 8 years ago

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How to Finance a Business

That's a great article on how to finance a business. One thing to consider is the cash operating cycle. If you adopt a business model where you receive cash from the customer before you have to despatch, such as online retail, then you may not need that much finance in the first place. I found some interesting articles at http://www.smallbusinessfinancetips.com/how-to-finance-a-business.html

over 8 years ago

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affluent123

Nice post. Good tips has been given. It will be very useful for my business. I used to get a good marketing tips and financial information fromt he gentlerainaffluentmarketing financial advisors. They give good tips and the information on how to do the business and how to estabilsh the brand.

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over 8 years ago

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Ted01213

Good post. Thanks for sharing tihs useful infromation. The post seems to be very useful one. I used to get more marketing tips and the financial service from the gentlerainaffluentmarketing.com They provide good tips and useful information on how to do the marketing business in a successful way. They give good financial service.

over 8 years ago

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New Business Start up web sites

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over 8 years ago

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Susan098

Thanks for sharing this useful information. I knew a good site gentlerainaffluentmarketing.com good financial advisors are available and they provide a good tips and the useful information on the marketing business. They show the best ways to do the marketing business successful. They provide a personal coaching along with the video.

over 8 years ago

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Nathan123

Informative post. For all thebusiness investment Financial Advisors are so much important to guide the business. By the way do you heard about the site http://www.gentlerainaffluentmarketing.com/. They are exclusively for the Financial and insurance Advisors.

over 8 years ago

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jack

I prefer the bootstrapping method. It takes longer to get moving, but avoiding debt makes business so much more pleasurable! Nowadays there really are lots of business opportunities that can be started with little or no money…

almost 8 years ago

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McClain @ In2OnlineHelp.com

Hello;

Well let me give you the "old guy" low down on starting a business and developing the coin to pull it off.

First of all spend some time actually putting a business plan together for yourself  and those who you will at some time find it necessary to ask for serious cash.

This process will either make you more passionate or show you the error of your way.

Good luck;

McClain

over 7 years ago

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