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What Is Seed Funding?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 10 September 2016
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Seed funding is the money required by start-up companies to either begin operations or to fund the production of the item or items the company plans to sell. This round of funding is usually the first that the business uses and it allows investors to get in on the ground floor. In some cases, seed funding may be provided by friends or family or by the business-owners themselves, but outside help is generally required for a new business to survive. Venture capitalists, who provide funding in return for ownership shares in the company, and banks and other financial institutions, which provide business loans, are other methods of early financing.

Many people only become aware of a company after it has already established itself on the market and is selling products to consumers. They may not be aware of the early stages in the life of that company, which include the search for viable funding just to get the business off the ground. The initial capital that a business uses to find its footing is known as seed funding, and very few entrepreneurs can make a dent in the business world without it.

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Capital that helps a company or business venture get underway is known as seed funding because the money provided acts as the seed from which the company can grow. This round of funding may actually help with start-up costs like hiring employees or buying or renting a place of business. In some cases, the company may have already completed these operational necessities, but needs funding to manufacture, distribute, and market the products at the core of its business.

Many entrepreneurs look to close relations to provide the seed funding they require. When the funding required can't be provided by friends and family, new business-owners can turn to venture capitalists. These investors will provide funding, but they generally require some sort of equity stake in the company in return. Entrepreneurs must be prepared to yield a little control of their business if they use this funding option.

Banks and other lenders may also provide seed funding through loans which cater specifically to small businesses and other start-up enterprises. These lenders will often require the business-owners to provide them details of their plans so that they can decide if the loan is a worthy investment on their part. The lenders then provide the funding with the expectation that the business-owners will pay back the loan at an interest rate determined at the onset of the agreement.

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