Entrepreneurs often struggle to find sources of finance to get their startups rolling. Lack of financial history as well as unproven products or services, as well as a highly competitive environment often make it extremely difficult to raise funds.
Traditional finance may not always be the best option when it comes to raising funds for a startup - however they should not be ignored. The problem with raising seed capital (aside from the lack of historical data and financial records) is the fact that banks have tightened up on their lending practices ever since the sub prime scandal. In fact the United States government has forced financial institutions to be a lot more conservative in the their lending practices - and the current economic environment has also made banks a lot more reluctant to lend money to startups - many of which fail in the first year of operation.
So where does an entrepreneur who is willing to put in the hours and has a great idea go to find that elusive seed money?
The two traditional sources of funding are friends and family and venture capitalists. However, bit of these approaches can have their own fair share of potential problems.Venture capitalist firms bring more to the party than simple funding. Many have staff and expertise that can help the entrepreneur with research and marketing as well as office space, accounting and administration. In short they will help with all the things that make a business tick. They'll also follow up with further capital as the business grows and becomes more successful. The down side is that they will want a big slice of equity. They also may take a short term view (i.e. realize profit and exit) than that of the founders.
The second option is to approach friends and family for funding. This sort of funding is based on these people actually liking you - that's great but the downside is that they very rarely bring anything to the party except capital. They don't have the business experience to provide meaningful input and if you require any followup capital traditional sources of funding might not be very happy with the due diligence that was undertaken in the initial funding stage. In addition mixing a personal relationship with a strictly business arrangement can put enormous strain on that relationship.
Funding can be difficult, however with the correct business plan a loan from a traditional financial institution is possible - especially if you have a long and unblemished record with your bank. As for the other sources? The choice can be difficult, but then again realizing your dream may make it all worth it.