Medium term bank or investment company loans Mezzanine finance Public equity Public debt A company should maintain its financing structure in a manner that its personal debt and collateral are in well-balanced manner.
Unfortunately, the need for capital never ends. This means that understanding how to find and shake the "money tree" is critical.
And before you begin your search, there are a number of crucial questions you must ask yourself - and answer. Don't be misled by the popular literature - having little or no capital is a primary reason why businesses fail.
Even an independent cell phone app developer has to eat until the application has been designed, programmed, and marketed before any revenues begin. If your startup business requires even minimal outlays for offices, equipment, or employees, the amount of capital needed before opening your doors for business is likely to be significant.
Being Realistic Entrepreneurs are often wild-eyed optimists, an often necessary attitude to get their ventures off the ground. But instead of a unique product, record sales, and slow competitors they usually envision, the real world is quite different. A complete plan identifies and quantifies the capital that is likely to be required to reach break-even and beyond.
It is absolutely essential when soliciting investors. You will get a better understand of your market and the competitors you will face You may avoid costly disastrous mistakes in the future You will have a realistic view of the capital needed to start your business and keep it alive until it can stand on its own Furthermore, bankers and potential investors generally evaluate entrepreneurs and the potential of their ability to deliver success on the quality and completeness of their business plan.
Asking for Enough Money The most egregious, indefensible mistake an entrepreneur can make when seeking capital is asking for too little to have a chance at success.
Lacking sufficient capital in the beginning is akin to starting a long journey with empty pockets, a broken-down vehicle, and a half-tank of gas; the odds that you will reach your destination are slim to none. When calculating the capital you need, plan that everything will take twice as long and cost twice as much as you expect.
Figure that your worst-case scenario will occur, not your best-case. Don't assume instant profitability, a common mistake of many first-time entrepreneurs according to the National Federation of Business. And remember, if you don't raise enough capital initially to cushion your company if sales are slow or emergencies occur, it will be nearly impossible to raise more money just to keep the business going.
The most common source of startup capital is the business owner him- or herself in the form of credit card advances, home equity loans, and loans from family members.
Federal and state governments sponsor numerous subsidized loans and grants for startups through the Small Business Administration and its counterparts on the state level.
When these sources are exhausted or unavailable for some reason, entrepreneurs usually seek capital from private sources such as commercial and investment banks, groups established by private investors to exploit such opportunities, wealthy individuals, and venture capital funds.
Their proposed investment is usually styled in the form of debt, equity, or a combination of each: The most common form of capital used by startups is debt, and it is secured by the assets of the company including the possible personal guarantee of the owners.
As time goes by, the company repays the principal with interest from cash flow. If the business fails, the lenders foreclose and liquidate the assets for repayment, possibly seeking any deficiency from the owners.
Asset lenders are concerned with the market value of the assets, not the business enterprise, lending only a proportion of the asset's value to the company in order to ensure repayment.
Lenders are not normally in the business of taking risks.
Business valuation is an art, not a science; the conclusion is always subjective depending upon the perspective of the valuator. Entrepreneurs typically want as much money as possible for as little equity as acceptable; investors are the opposite, wanting as much equity as possible for as little money as possible.
The final equity proportions and amount of money raised is generally a compromise based upon the eagerness of the investor to invest and the desperation of the entrepreneur looking for money. Delaying capital infusions from non-affiliated third parties as long as possible until you can prove the business concept and show revenues is always the best approach.
Investors typically require that entrepreneurs have "skin in the game" before being willing to invest their own money, and prefer you've made progress toward implementing your business plan as well.
What Is the Value of My Company? The value of a company is important because it is the basis for determining the "cost" of the new capital when seeking equity additions to the capital structure.
Generally, a valuation considers four questions: How much is the company worth today? How much could it be worth in the future? How long will it take to create the future value? What is the likelihood of achieving success? There are a number of different methods used to value startup companies. Understanding how your company will be evaluated and being able to affect the valuation positively can enable you to get higher valuations and retain greater ownership of your company when the investment is funded.
As the amount of funds needed increases, you will be required to access an increasingly sophisticated investor seeking maximum return for assuming the risk of a new venture. Family and friends are typically the first group sought by business owners seeking capital - they are less discriminating than professional investors, and are more likely to invest due to the relationship than the economics of the business proposal.
On the other hand, family investors bring their own set of problems, including the possibility of strained relations if the investment fails.
VCs and Angels Funding Are Rare While entrepreneurial magazines and websites promote the availability of angel investors and venture capital VC firms for capital, very few startup firms interest either type of investors or can survive the rigorous screening process.
As a consequence, according to the Kauffman Foundation director of Private Equity and former venture capitalist Diane Mulcahy, VC is the exception, not the norm, for startups.Free Essay: Explain what sources of finance are available for small to medium sized companies and explain why they sometimes face difficulties in raising.
Explain what sources of finance are available for small to medium sized companies and explain why they sometimes face difficulties in raising finance. Debt financing is also called bond financing, it's the way that your firm can raise money for enterprise's exterior finance; and arrears can even be conducted and suited to the requirement of issuing companies and buyers (Watson, et al., ).
MSMEs in general face difficulties in raising capital because of the unwillingness of banks to provide finance (Berger and Udell, ).
The contribution of SME s is presented in Table The Problems That Small Business Owners Face by Sam Ashe-Edmunds - Updated September 26, Lack of experience running a business causes small-business owners to make avoidable mistakes common to thousands of entrepreneurs.
Sometimes economic cycles affect specific industries, and other times they create generalized problems for the entire business community. Smart companies plan for fluctuations and try to build.