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What Is Startup Capital?

What Is Startup Capital?
What Is Startup Capital?

Startup capital is the money a business owner needs to start up a new company. This funding helps the business meet its initial costs, such as office space or equipment. Raising startup capital is an important step in the process of launching a new business

Learn more about startup capital, what it can be used for, and what sources it may come from.

What Is Startup Capital?

Startup capital is the money used to start a business. It covers the expenses necessary for getting a new company up and running, such as:

  • Renting or leasing space
  • Furnishing the office
  • Paying bills or utilities
  • Buying equipment and supplies
  • Hiring professional services (accountant or lawyer)
  • Stocking inventory
  • Paying employees

The costs of starting up will vary depending on the type of business, the industry, the location, and other factors.1

  • Alternate name: Startup funding

How Startup Capital Works

When launching a new company, a business owner needs some way to cover the costs of starting and running that business before it begins generating revenue. Startup capital is the money they use for funding their operations.

This capital may come from the business owner’s own funds or another source.

If the source of the startup capital is a loan or an investment, there will be an expectation that the source of the funds be repaid down the line.

For example, a startup software company might receive funds from an investor, which they use to rent space, hire employees, develop their product, and market it to buyers. In exchange, they promise a stake in the business. Once the company begins making sales and generating revenue, both the business owner and the investor can focus on future growth and profit.

Types of Startup Capital

When an entrepreneur is looking for startup capital to launch their business, they may consider a few different sources.

Owner’s Funds

Also called bootstrapping, this method of obtaining capital uses the entrepreneur’s or business owner’s own funds to launch the startup. The owner may use acquired savings to pay for expenses, or they might take out a new mortgage on their private home or find another way to raise the necessary cash.

Crowdfunding

A new business may ask for funding from a wide pool of funders, who help fund the startup, often without asking for equity or interest in return. This method is called crowdfunding, and it is a low-risk way to obtain funding for a business.

TIP: Crowdfunding sources include equity crowdfunding sites, rewards-based crowdfunding, and marketplace lending.

Business Loan

A new business trying to get on its feet may finance its operations with a business loan. A variety of loans are available for business ventures, including small business loans for startups. You may also be able to get credit from your suppliers or other sources.

Venture Capital

A promising startup might secure venture capital funding, which is when a group of angel investors or venture capitalists pledge to invest in a company in exchange for equity, or a stake in the business, and a portion of the profits down the line.2

Do I Need Startup Capital?

In order to rent space, buy equipment, develop new products, and market or sell your service, you’ll need some form of capital. Startup capital gives you a way to launch your business and provide for those costs until you start bringing in revenue.

It’s especially important for businesses that have greater operating expenses or those that depend on specialized equipment.

How to Get Startup Capital

Successfully investing in your business requires a solid business plan and a budget that accounts for startup costs. Once you’ve worked out what you expect your startup expenses to be and have created a budget, you can begin looking for startup capital.

If you decide to bootstrap the business, you’d turn to your own bank accounts for money. You can also reach out to a bank for a small business loan, many of which are backed by the Small Business Administration (SBA). You may have to prove your creditworthiness in order to qualify for these loans.

Or, you can seek out angel investors interested in equity financing to provide the startup capital for your venture. You can also look for investors at venture capital firms. Be prepared to sign over some equity in your company in exchange for this funding.

The interest on a business loan or the equity promised in exchange for funding are the cost of capital, or the price of obtaining that funding.

Key Takeaways

  • Startup capital is the money required for launching a new business.
  • Startup capital may come from the business owner, or it can be obtained through crowdfunding or a variety of financing options.
  • With startup capital in place, a business can grow its operations and bring in revenue.
  • Depending on the source of the startup capital, there may be a cost of capital, such as interest, which must be repaid.

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[…] Business startup costs are considered capital assets and they must be amortized. But you may be able to up to $5,000 of business startup costs and $5,000 of organization costs (for forming and registering your new business) in the first year you are in business. […]

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[…] is the financial resources (money and other assets) a business owner uses to fund their operations and make a profit. It can consist of cash, […]

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