The journey of financing a small business or startup can be likened to navigating a diverse landscape, with two primary terrains: Equity Financing and Debt Financing. Some common source of financing business is Personal investment, business angels, assistant of government, commercial bank loans, financial bootstrapping, buyouts. Let us discuss the sources of financing business in greater detail.
Sources Of Financing Business
Best Common Sources of Financing Your Business or Startup are:
- Personal Investment or Personal Savings
- Venture Capital
- Business Angels
- Assistant of Government
- Commercial Bank Loans and Overdraft
- Financial Bootstrapping
Personal Investment or Personal Savings:
One of the foundational pillars of business financing is personal investment or personal savings. Entrepreneurs often kickstart their ventures by injecting their own capital, showcasing a strong commitment to their vision and a willingness to take risks.
Under this form of corporate financing, the financial investor participates in the fresh business in exchange for strategic advice and cash.
Venture capitalists are thus on the lookout for companies having high growth potential, top-performing management teams and low leverage capacity. You can look at the table to gain insights into the top VC firms in India. It also lists the businesses being funded.
These are the professional investors who invest either just a part or their entire wealth as well as time in the growth of innovative companies.
As per estimations, the quantum of angel investment is equivalent to three times the venture capital. Frederick Terman, the “Father of Silicon Valley” can be accredited with the introduction of business angels. He invested $500 which in turn fuelled the growth of Bill Hewlett and Fred Packard.
Assistant of Government
Government assistance can provide a significant boost to small businesses. Grants, subsidies, and other forms of support contribute to the financial ecosystem, fostering growth and innovation.
Commercial Bank Loans and Overdraft
Traditional sources of financing, such as commercial bank loans and overdraft facilities, offer entrepreneurs both long-term stability and short-term flexibility. Collateral may be required for bank loans, making them ideal for financing fixed asset investments, while overdrafts can help navigate seasonal cash flow fluctuations.
Here the goal remains to build a sustainable business comprising of committed employees as well as a growing customer community without having to seek out the assistance of a bank loan.
Various examples of financial bootstrapping are sweat equity, owner financing, joint utilization, minimization of accounts payable, delaying payment, minimization of inventory, subsidy finance etc.
This form of corporate finance can alter the form of a company’s ownership. After the company attains a private status by being freed from the regulatory burdens of operating as a public firm, the ultimate goal of buyout remains to build its value.
Selling off non-core assets, refocusing on the mission of the company, streamlining processes, freshening product lines and replacing existing management might thus serve as essential parts of the buyout drive.
Things which can limit the inclination of an investor for financing business
- Market and industry trends.
- Development possibilities of start-ups as the distribution of possible outcomes, increase coupled with the venture’s uncertainty.
- Soft assets are spreading over markets thus making lenders less willing to provide adequate credit against the same.
- Information gap pertaining to what different players know about the investment decisions of a company.
- The volatility of market which can affect the current value of the venture as well as its potential profitability.
Things which an investor needs to ensure prior to financing business
- What is the cash burn rate?
- Devising a contingency plan and doing proper scenario analysis.
- Means of minimizing dilution by outside investors.
- The worthiness of investing money and time in the business.
Critical determinants of the financial requirements faced by a venture firm
- Calculation of one-time start-up costs.
- Determination of projected growth, sales as well as their profitability level.
- Working capital projection consisting of credit, inventory and payment policies which determine the cash requirement in day-to-day business.
- Estimation of recurring costs.
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