Overview of Financing a Business Venture
Obtaining funds to establish, operate, and grow a business is an essential component of entrepreneurship. Surveys indicate that one of the greatest hurdles to entrepreneurs undertaking a business venture is the availability of funds. It may surprise you to know that of the 500 fastest growing businesses of 2013, more than half of them started with less than $20,000 capital investment. With that said, from that initial investment, these firms were incredibly successful in securing the additional funds necessary to continue operating and growing the business.
Sources of Funding
Adequate financing is incredibly important to the success of a business startup, regardless of the stage of development. There are several basic ways of getting money for your business:
- Company Revenue
- Personal Funds,
- Personal income (Bootstrapping)
- Personal Savings
- Personal Debt,
- Credit cards
- Secured loans or lines of credit (Home-equity loan)
- Gifts from Others
- Generous family members
- Loans from Friends or Family,
- Interest-bearing or Interest-free promissory notes
- Loans from Financial Institutions,
- Generally personally guaranteed or fully secured by assets
- May be government backed (SBA Loans)
- Selling Equity Ownership
- Partners of business co-owners
- Other Methods
- Cash Flow Financing
- Receivable Financing
Each of the above funding sources are discussed in greater detail in individual lectures.
Choosing a Funding Method
Various forms of a funding is available at each stage of the startup ventures. For example, among founders, over 80% of businesses begin with some form of personal funds of the entrepreneur; while approximately 35% receive funding from co-founders of the business. The important thing to remember is that each business is unique. Focus on the type of money that meets the operational needs and personal preferences of the stakeholders. Ask yourself the following questions.
- How much do you need?
- Banks look at smaller amounts than equity investors.
- Know the investment range for types of investors.
- What will the money be used for?
- Banks like to see money used for hard assets.
- Equity investors are willing to accept alternative uses of cash.
- At what stage in the lifecycle is your business?
- Most banks avoid early stage due to the risk.
- What is your capacity to repay the money?
- Lenders look at cash flow of the business for the ability to pay.
- Equity investors look for a exit event return on investment.
- Other Considerations
- Investors look at the individuals involved in the venture as much as the venture.
- Money doesn’t go to the best idea, but to the business team with a solid idea that has the best opportunity to execute.