Other Alternatives

What are other financing options besides equity and debt?

The list of other financing options is very long, but can be classified into the following categories:

Nearly all entrepreneurs utilize personal resources to start a business. For example, many entrepreneurs start their business out of their homes, using their own administrative resources such as their own telephone, computer, furniture, vehicles, etc. In addition, before entrepreneurs secure customers and/or receive outside funding, they typically work for "free," meaning that they are not compensated in the traditional sense for the time that they work. Moreover, some of them use their savings to pay for the initial launch costs like product development or marketing expenses. In fact, successful serial entrepreneurs often use the financial gains resulting from their previous ventures to launch new companies.

During the initial stages of a company's life cycle, an entrepreneur can sometimes depend on her fellow founders and managers to support the business. For example, other founders may be able to contribute their own personal resources to the venture. Additionally, often other founders and managers will work for significantly less and/or deferred monetary compensation than they would otherwise require when helping to launch a business.

The support of their family and friends is often very helpful when starting a business. Family and friends can contribute assistance similar to those described in Personal Resources. For example, a woman beginning her own catering firm may ask her daughters to act as servers for the first few engagements. Alternatively, a budding software entrepreneur receive a computer system as a birthday present from her family. Additionally, some entrepreneurs are lucky enough to turn to Family and Friends for significant financial support. The Friends and Family of very well-connected entrepreneurs are often business people themselves and can offer not only financial assistance, but also relevant business advice and industry expertise.

Customers are the most traditional source of capital. A new company will receive money--or revenue--for the products and/or services that it has provided to its customer. Ideally, the amount of the revenue is greater than the cost of producing the products and/or services. The difference between the revenue and the cost is profit, which can be plowed back into the company to fund its growth. High margin products and/or services, or goods for which the profits are relatively high as compared to the costs, are often good sources of capital.

Many of today's high-growth companies incur expenses either (1) prior to being able to deliver a product or (2) at an initial level that cannot be covered by the initial revenues. However, these companies are sometimes able to secure advance revenue, or payment from customers for products and/or services that are to be delivered in the future. Also, many companies in their initial stages of development offer high margin services, the profits of which are used to fund product development and other expensive processes.

Suppliers can be a source of capital when they deliver a product or service necessary for a new company's development before receiving payment. For example, if a new company orders and receives 5 computers for its employees in June and is not required to pay for them until October, the computer vendor is effectively a source of short-term capital. This type of financing, which involves the Accounts Payable line of a company's balance sheet, is a form of debt capital.

Federal, state, and local governments have many programs that promote entrepreneurship and the advancement of technology through the disbursement of grants and awards and other types of assistance. These programs number in the thousands and are very diverse, and the eligibility of a company for these resources can depend on the company's stage, industry, location, business description, owner, and other factors.

Many new companies are boosted by the support of partners that have a strategic interest in their development and success. Strategic partners can include large corporations, research universities, community groups, as well as other entities. These partners can provide assistance in the form of capital, personnel, office space, intellectual property, intangibles, etc.