Financing Your Business
Equity Financing
One option for financing your start-up business is to look solely to your own personal assets. An entrepreneur can receive equity funding by mortgaging personal assets (house, car) as security. Other options include looking to friends and family for money, using personal credit cards or a personal bank loan. This type of funding is usually quite risky because if your business fails, your personal assets will be at risk. On the other hand, equity financing can also result in large pay outs since the entrepreneur will most likely realize most or all of the profits themselves and have 100% equity in the business.
Outside Financing
In many cases, even if the entrepreneur is able to fund start-up by themselves, it is unlikely that their own equity financing will last up to the point where the business starts to turn a profit. When this happens, business owners need to look elsewhere for financing. If they are unable to finance the business needs exclusively with debt they are going to need to look other places. The following are a couple examples of where they could look:
Private Investors/Angel Investors
Private or Angel investors are usually very wealthy individual who are willing to invest in your business. They can be friends, family, friend of the family or a successful entrepreneur who is looking for new investment opportunities. There has also been a recent trend where several angel investors work together and invest in specific projects together. Finding angel investors is not always easy. The best way is to ask around and talk to your professional acquaintances. If you do get in touch with an angel investor, ensure that you are prepared to plead your case, have a sophisticated business plan and have your business's legal affairs in order, particularly in regards to securities law.
Venture Capitalist Firm
In general, venture capital is a pool of equity capital that is managed by a venture capitalist firm. Wealthy individuals invest their money with the venture capitalist firm and then the venture capitalist advisors decide which projects to invest in. If you are approaching a venture capitalist firm, you need to be incredibly prepared and armed with a business plan that is well researched and well written. These are very sophisticated firms that will undoubtedly investigate your business plan so you need to ensure that their investigation will only have a positive outcome. One aspect to keep in mind is confidentiality. If what you are proposing is something you believe others might want to steal from you or is proprietary in nature, be careful how much information you divulge about your actual product or service.
Corporate Investors
Corporate investors is an up and coming field of potential capital for entrepreneurs. Entrepreneurs will really only be able to look to these types of investors after start-up when the business has proven itself as successful.
Internal Financing
Internal financing, probably most useful for already established businesses, can be attained in several ways. Reducing working capital is one way to create more internal financing. Lowering overhead and cutting costs is the best way to create this type of financing. Another way is the sale of assets. Selling off unused assets or excess assets can create extra financing for a business. Accounts receivable is another alternative. Collecting on bills more quickly and efficiently will create more available cash for your business.
Debt
Debt is one of the most common forms of capital for start-up businesses and entrepreneurs. It is one of the most popular because of its predictability since it is repaid according to a set schedule. It is also popular because the lender usually attaches the debt to an asset and therefore will have something to collect on even if the entrepreneur defaults. Lenders can also be repaid out of profits of the business (cash flow financing) instead of attaching the debt to an asset. This type of debt capital, allows the entrepreneur to borrow against their predicted income into the business. Cash flow financing usually is only given to a business that has an income history and therefore is hard for start-up businesses to attain.
There are so many different options when it comes to financing your business whether it be a start-up or an established business. Contacting your lawyer can be the first step in deciding which option is right for you and your business.
