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Starting a business

Small Business Term: What Is Start-Up Capital?

Startup capital is the money you raise to get your business off the ground. With a bit of funding at the right stage of development, you can go from ideas to a thriving business that employs a bunch of people. You have a lot of choices when you’re looking for money to get off the ground.

Capital to start your business can come from almost anywhere, but most entrepreneurs borrow it. So-called debt financing can be a loan you take out to start your operations or to develop a prototype of your invention. You borrow the cash you need, and then make payments plus interest until a set term expires. When you pay off the loan, you aren’t in debt anymore and can keep your profits. Bond issues operate in much the same way. These are often done by existing companies that want to expand into a new product or market but don’t have the money on hand to pay the up-front costs.

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Another type of startup capital is equity financing . In this model, you’re not borrowing money, you’re selling parts of the company known as shares. Buyers invest their money, and in exchange, they have a right to some of your profits going forward. Sometimes they also have voting rights in how you run the company. Equity funding for startups usually comes in three rounds:

  • Round A (“seed”) is highly speculative and mostly based on your business ideas and plans.
  • Round B (“angel”) funding comes after the proof of concept for your idea, when you’re ready to build facilities and hire a workforce.
  • Round C (“mezzanine” or “venture”) funding comes after you’ve proven you can produce your product and a market exists that’ll pay for it. This startup capital is most often used to fuel a dramatic expansion into your first markets.

Whether you’re borrowing against future profits or selling a share in them, startup capital can get your business off the ground. Give some thought to which kind works for your business idea, and then move ahead with the money you need to succeed.

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