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Generally, in business there are two ways to obtain start-up capital (assuming you don't have the funds yourself): investors and lenders. There are other methods, but they are rarely applicable to for-profit corporations. Investors will want to take a percentage of your income. The benefit to using investors is that if your product fails and you lose all of your start-up capital, your investors lose whatever money they put in and you have no obligation to personally pay them back. Lenders are also available to give you a business loan. The benefit of using a lender is that once you pay off the loan, your relationship with that lender is over. Investors will get a portion of your profits every year until you buy them out.
Investors may also want to have some control in the way you run your business, while a bank lending you money doesn't require that they have any control of how you operate your business.
The problem with loans is that banks will almost always require a personal guarantee when the business is new and/or doesn't have enough proven cash flow and assets to cover the loan. If your product fails, you will be required to still pay back the bank.
Which way you go depends on your specific situation. Is your personal credit score strong? Do you have a significant amount of personal assets? Do you have anything you can use as collateral to obtain a loan?
Luckiest is right on point (as always) that you need a business plan. No bank or investor will even talk to you if you don't have a detailed business plan drawn up. If you need assistance creating a business plan or determining the best method to obtain funding, feel free to let me know.
In general, if you can obtain funding for everything at the start, that would be the way to go. However, I don't know your current situation, and I don't know exactly what you are selling, whether you plan to sell them individually or if you plan to sell them in bulk, so I cannot tell you for sure whether you should try to obtain funding in full or start by selling a couple of units here and there.
How long investors are willing to wait depends on how much you are asking for, the potential for growth, and many other factors. In your business plan you need to include a break-even analysis as investors and banks will surely want to see that. Generally, angel investors and VCs like to get in at the beginning and get bought out quickly (within two or three years). However, there is no definitive answer as to how long they would be willing to wait if the potential profit is large and your business plan is strong.
Let me know if you need any additional assistance setting up you business or finding investors.
Thank you for your response bpfinance. You have dropped a lot of very good and interesting information on us for our review and consideration. We have evaluated the pros and cons of investor vs lender and the risk as well as the benefits associated with both. We are not opposed to giving a investor a portion of our income or giving up some control of part of the business IF the percentage is not unreasonable, proportionate to the amount of their investment, or allowing them to control a portion of the business assuming they are capable of performing that portion of the business at a higher level AND at a higher success rate, e.g. distribution or marketing than we could perform ourselves. Being that both parties will have a vested interest to see the business succeed the only possible conflict that we see is who is capable of doing a better job in a given area, and even that can be rectified by performance on a "trial basis".
Who determines the amount of the income given an investor and the amount of control, including what portion of the business we relinquish to investor control. Are we correct in assuming both aspects can be negotiated based on various factors including but not limited to the amount the investor will contribute? Can we include in our contract that we will have an opportunity to buy back the interest and control of the business after a certain amount of time has past for x amount or a percentage of the gross income. Will the investor have a right to sell their share of the business to a third party without our consent?
I think your decision to start small or go big is very dependent on the cost it takes to make the product and amount you can sell it for. If you can make just a few parts and still make a decent profit on it, then by all means make just a few and go out and sell them. This would be very beneficial because you can find out what the product will sell for in the open market and then create your financial projections based off of real information which investors and lenders like.1 of 1 people found this helpful
However, if your product cost is highly dependent on the quantity you have manufactured because of quantity-price breaks or molds needed, then you need to get a prototype (either physical or 3D CAD Model) and go out find out what people will pay. Go to bike shows or bike nights and ask everyone how much they would pay and what they think of your item. Make sure you at least have a provisional patent first. If someone is really excited about it, ask them if you can quote what they are saying.
If you have a CAD drawing, you can send it to some manufacturers and find out how much it would cost to produce and make sure to ask about price breaks. You should be able to get a CAD drawing from some freelance draftsman less than $500.
After speaking to people at the bike nights and having manufacturing costs will allow you to do financial projections.
Basically, I am saying that the financial projections are basically made up but if you can have some real data to backup your numbers then you are a lot better off than most people.
Hope this helps and doesn't confuse you more.
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We have a new product that is currently in the developmental stage. We are also seeking startup capital for this venture. Should we seek an amount that will cover development, marketing, manufacturing, distribution, etc.... or can we start small e.g. sell 10 units here or 20 units there then when the need arises and we need for example large scale manufacturing then seek a source for it or large scale marketing and so on. Do lenders require some type of time table?