When starting a business, sometimes one does not have enough money from his own personal sources to fund the business startup costs (‘capital’). There are two main sources of additional funding:
- Debt – basically you take a loan from a bank, or a friend, and agree how to pay it back.
- Equity – basically, you find someone to ‘invest’ in your business. They then get to own a certain agreed part of your business.
Usually, debt financing is much, much cheaper than equity financing. However, they are both sometimes unattainable for very young businesses. What to do?
Well, there’s a third source of funding. It’s not much different from debt financing but it is different enough. Basically, get someone who has some spare money and who is not a seasoned/experienced investor. Perhaps someone who retired recently and is looking for something to invest in (like a retired dentist).
You then offer them a deal: give me some money to launch my business and I’ll give you a certain percentage of my sales. Think about it – no endless meetings, punitive interest rates, complex accounting. You just pay a commission on your sales. It could work, ama?
Adapted from Seth Godin’s article.