Small businesses have a variety of alternates to the regular bank credit these days. Not only can they seek support from usual banks through business lines of credit and small business loans, but they can opt for P2P lending, and even seed money if they are a thriving startup. Seed money in past decades has been usually provided to technology firms and entrepreneurs who have an idea that can cause disruptions across the world. However, seed money can be hard to get and may result in a loss of future control over the business.
Understanding Seed Money
For new startups, seed money is the first round of capital injection from an angel or institutional investors. In contrast to the business line of credit or small business funding that small businesses can avail of, seed money is usually seen as a purchase of shares and interest in the new business. There are no interests to be paid, nor money to be returned. All money is seen as an advance payment for a subsequent share in the startup when it transforms into a profitable business. Because getting seed money can be harder than a regular small business loan, many businesses may never start in the first place. It takes a very exceptional idea and a real game-changing prospect that can lure investors into spending into a startup.
Who Funds the Seed Money
Seed money can be provided by family members, friends, trade unions, angel investors, or institutional investors. The major reason for providing seed money by institutional investors is to capitalize on their earning potential for future gains. Institutional investors usually take charge of the business as it moves from the idea stage, and starts generating revenue for the investors.
If you were thinking that seed money is risk-free, then you should think again and opt for the regular small business funding options such as working capital loans, and business line of credit. Because seed money is received from institutional investors and those who wish you success in an early stage, might be the first to take charge when the business starts functioning this has been a common practice across the technology and manufacturing industry. This is partly because investors who now are potential shareholders will look for wealth maximization in the shortest possible time. Much of the money spent is returned by selling shares, receiving dividends, or using the business as a vehicle to transform other strategic businesses.
Another risk is that the institutional investors themselves might not invest any more money in the third or fourth cycle of investments. Because startups need a regular injection of money, not getting the subsequent seed capital may result in loss of business confidence, loss of customers, and total shutdown if the business runs out of it.
Irrespective of the seed money or venture capital available, you will require a business capital loan and secure a business line of credit for future operations. Seed money may not cover all your working capital needs on a regular basis.