Sources of Financing for small business or startup can be divided into two parts: 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
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.
You can take the example of gym owner David Osorio of Crossfit South Brooklyn who started his Crossfit affiliate with just a handful of clients back in 2007.
But over the due course, the bootstrapped operation brought 600 members and 20 employees under its wings and even got a dedicated space in Gowanus, Brooklyn.
Browse more Topics under Growth Challenges Entrepreneurial Venture
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.
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.
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.
|Accel Partners||BabyOye, Flipkart, Book My Show, Myntra|
|Helion Venture Partners||MakeMyTrip, Yepme, TAXI For Sure|
|Sequoia Capital India||iYogi, JustDial, bankbazaar.com|
|Blume Ventures||Printo, Carbon Clean Solutions, Exotel|
|IDG Ventures||Yatra.com, Ozone Media, FirstCry|
|Canaan Partners||Bharat Matrimony, Naaptol, CarTrade|
Loans & Overdraft
Bank loans serve as a long-term mode of financing entrepreneurial business. Overdraft facility is for a short-term span. Under a bank loan, the financial institution shall specify the loan tenure.
As well as the timing, amount of repayments and interest rate. The entrepreneur gives some collateral in exchange for the bank loan. It serves as the ideal choice for financing fixed asset investments.
They offer a lower interest rate compared to a bank overdraft. However, they do not rank high in the department of flexibility.
A bank overdraft can be of assistance when the bank balance of entrepreneurs fall below the minimum level. And they can borrow some money from the bank itself in exchange of a high-interest rate. They are thus ideal for dealing with seasonal cash flow fluctuations or when the business faces a short-term liquidity crisis.
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.
Solved Question for you
Question: What are the key points of difference between venture capital and business angels?
Answer: The following are the key points of difference between venture capitalists and business angels.
|Venture capital||Business angels|
|Other people’s money||Own money|
|Higher expected IRR||Lower expected IRR|
|Shorter investment period||Longer investment period|
|Start-up or growth stage||Incubation stage|