There are four major types of business financing: the bank loan; personal financing; venture capital; and grounding. The report will explain how each type of financing can be obtained and will match that financing to the best type of business suited to obtain it. Bank Loans There are many reasons small businesses apply for loans. One of the more popular ways to apply Is through a bank. Bank loans can be very time consuming for the business owners and do require a great deal of paperwork.
When a small business owner decides to apply for a loan there are a few steps they should take before making an appointment with a loan officer. The first step a small business owner should take when applying for a bank loan is o pull their personal and business credit reports. They should also perform background checks on all of the company’s owners. Some banks may also require resumes on all of the owners. There are three bureaus that report personal credit history and ratings: Transition, Experience, and Aquifer; Dun and Broadsheet (or D) reports business credit history and ratings.
The information in all of the reports should be verified and checked for accuracy. Any inaccuracies should be removed prior to submitting the application. This Includes anything negative and anything that can be corrected beforehand. The next step the business owner should take Is to prepare a business plan. A well-organized business plan Is very Important In showing the loan officer that the business can turn a profit and that it deserves a loan. The business plan should include the projected financial statements, estimated or past profit and loss, and a balance sheet.
A proper business plan can be very difficult to complete; therefore hiring an accountant or financial planner might be beneficial. The business plan serves to show the loan officer how and why the business will be (or will continue to be) profitable so the loan can be repaid. The loan officer does not want to approve a loan (whether big or small) that they believe will not be repaid. The third and final step that should be taken before applying for a business loan is to make sure that all of the documents that might possibly be required for the loan are available and ready for use.
Some of those documents may be: ; Past bank statements; A collateral document (an appraisal of the property to be used as collateral) ; Business licenses or registrations: Commercial leases The above items should be put together into a demonstration for the loan officer. As the owner of a small business you want the loan officer to give your application a second look. Make your case undeniable! Include charts, graphs, and an executive summary. The best sales person for your company is you! You are now ready to make your appointment!
The top four mistakes made by small business owners when they apply for a bank loan are: ; Underestimating the value of personal credit. The odds are if the owner has not been taking care of their personal bills the same will happen with the business in the future; ; Applying for the wrong type of loan such as a short term non for a long term project; and ; Expecting a loan to be approved without proof of collateral. They need something that will be tangible in case the business fails; and finally, ; Not making yourself known to the loan officer or the bank.
The best way to do this is to try applying for a loan at the bank you already use, as they are already familiar with you. There are many banks to choose from big and small. The best plan of action for securing a bank loan is to not rush into the process. Make sure you have all of the information prepared accurately and in a professional fashion. There are many companies today that can provide the tools to make the process more effective. Personal Resources Finding the funds for the start-up off new business can be quite frustrating.
Most new business owners do not have business credit; Just their own personal credit. As a result, they use their personal credit to finance the start-up of their business. Using personal credit to establish a new business is extremely dangerous and can put you into serious debt. The downfall of running up a large debt on your personal credit card(s) while getting your business off the ground is huge. What if it fails? What do you do once you have amassed a large debt with nothing to show for it?
Since using your credit to finance a business start-up means taking on a huge risk, it is neither safe nor smart. A business credit card offers you protection, but if you don’t have a business yet, you will not be approved for a business credit card. A better option would be to get funded by family and friends, if you can. Or better yet, to use a combination of the two: get some of the start-up funds from family and friends, and some of the start-up funds from your personal credit. Another popular alternative is to borrow the funds from your retirement savings or KICK.
Most plans allow you to borrow up to $50,000, or 50 percent of the value of the account, whichever is less. This is penalty-free, unless you don’t repay the loan on time, then the usual early withdrawal penalties will apply. Because you are borrowing the money, you will need to repay the loan to your 401 K with interest at a competitive rate set by your plan administrator so you can replenish your savings without losing the capital gain. Most plans also require you to repay the loan within five years, and before you change employers.
If you are self-employed or unemployed, this would not apply. Another good option is to obtain a low interest loan from a family member or close friend, rather than using all your own personal resources in the beginning. Getting as much as possible from relatives and friends and then tapping into your 401 K for risk. If you choose to pursue getting a loan from your family and/or friends, certain procedures should be followed: approaching potential lenders and presenting a professional loan request, will guide you toward a mutual agreement that will protect tooth sides.
The documents required in a formal loan request include the following: ; Loan proposal letter; Letter of intent; Personal financial statement; Promissory note Studies show that forty-one percent of new business owners finance their start-ups with personal credit cards. Other personal resources commonly used in financing small business start-ups include: savings, (including Rasps), pension funds, severance allowances, property refinancing, and the sale of personal property.
This may be because people starting new businesses have no alternative; if you don’t eve much collateral or an established credit history, getting a small business loan can be difficult. Venture Capital Venture Capital represents financial investment in a highly risky proposition in the hope of earning a high rate of return. Venture capital has an important role in the financing of startup and early businesses, as well as businesses in turnaround situations. The main sources of Venture Capital funding for a company consist of equity capital, preference capital, and debenture capital and term loans.
Equity Capital means ownership capital in which equal shareholders collectively own he company, enjoying the rewards and at the same time facing the multiple risks of the ownership. Their liability is limited to their capital contributions. In Venture Capital funding, the equity capital funds are permanent funds and there is no liability for repayment. It simply enhances the creditworthiness of the company. In general, the larger the equity base in a Venture Capital, the higher the ability of the company to obtain credit. Thus you may consider Venture Capital funding as the lifeblood of a start-up company.
Venture capitalists usually invest in new businesses or provide capital for existing businesses to expand. With venture capital you can sometimes obtain large quantities of money, and this money can help businesses with big start-up expenses or businesses that want to grow very quickly. Many businesses cannot secure financing through traditional sources like banks so they turn to venture capitalists. You can start a Venture Capital business on your own or with other investors. Some venture capitalists are hands-off and treat investments as loans, while others regularly make management decisions or ownership in the business.
The first step in setting up Venture Capital is finding a lawyer to prepare your legal comments. Your lawyer will help you decide a number of items. This will save you some time and money. Most venture capital funds are structured as limited partnerships. Limited partnerships generally have two types of investors, Limited Partners and General Partners. Limited Partners are generally non-active investors who commit to invest a fixed amount of money to the fund in exchange for a pro-rata share of the economics of the fund. The liability of each limited partner is limited to fund’s investments.
A General Partner will make a capital commitment of one percent of the commitments of all partners. Partnership Agreement – This agreement spells out all of the operational rules of the partnership. It would include the formulas for calculating the carry and the management fees. It would also detail limitations in the amounts and types of investments that the general partner is allowed to make. Offering Document – This is the marketing document for the fund. Unlike mutual funds which are heavily regulated, venture funds are generally not registered.
In exchange for the lack of regulatory burden, venture funds must avoid marketing in general. Venture Capital Funds are allowed to put together private placement memos which are designed to provide a potential investor with all of the information that such investor may require including explanations of the fund structure, its strategy and management. Subscription Documents – These are the documents an investor must fill out in order to invest in the fund. It includes personal information including contact information and tax identification numbers.
It also includes the investor commitment amount. It includes a questionnaire designed to determine whether or not the investor is qualified to invest in the fund. Term loans, also known as term finance in a venture UAPITA are in general a source of debt finance that is generally repayable in more than one year but less than ten. They are employed to finance acquisition of fixed assets and working capital margin. Most venture capital funds have a fixed life of ten years with the possibility of a few years of extensions to allow for private companies still seeking liquidity.
The investing cycle of venture funding for most funds is generally three to five years, after which the focus is managing and making follow-up investments in an existing portfolio. Yet, venture capitalists assume this risk alongside the company founders by providing capital in exchange for an equity stake in the company. During this investment stage, venture capitalists provide more than just money to the company. Typically, Vs. take seats on the boards of directors and participate actively in company operations and management personnel.
This commitment often includes providing strategic counsel regarding development and production, making connections to aid sales and marketing efforts, and assisting in hiring key management. As part of this process, the venture capitalist also guides the company through multiple rounds of financing. At each point, the company must meet certain milestones to receive fresh funds for continued growth. If the company fails to meet these goals, the venture capital responsibility to their investors may require them to walk away.
The venture capitals goal is to grow the company to a point where it can go public or be acquired by a larger corporation (called an “exit”) at a price that far exceeds the amount of capital invested. Approximately one-third of portfolio companies fail, so those that do succeed must do so in a big way. Typically, when a venture-backed company exits the portfolio, the venture capital distributes he profits to the fund’s investors and eventually leaves the portfolio company’s board of directors. Once all the investments of a particular fund have been exited and the proceeds have been distributed, the fund ends.
In many cases, however, the institutional investors reinvest these earnings in a new crop of funds and the process begins anew. Grounding is a method of fundraising used to launch business ventures, as well as for personal and artistic projects. As the name implies “grounding” is money raised through the contributions from a multitude of individuals- or a crowd- for a variety of reasons. Not all campaigns are supported by investors, seeking a return on their investment; some campaigns are supported by those who Just want to help make a project happen, charitably.
A historical example of grounding occurred in 1884 when the American Committee for the Statue of Liberty ran out of funds to complete the statue’s pedestal. Newspaper publisher John Pulitzer sought contributions from the American public through his newspaper New York World. He was able to raise over $100,000 in less than six months from contributions of less than $1 made by 125,000 Americans in response to his request. (BBC. O. UK) Today, musicians, film makers, politicians, floggers, non-profits, business start-ups all utilize the Internet to reach the crowds interested in helping the fund raiser achieve their fundraising objectives.
Three of the most popular websites dedicated to facilitating the grounding (CB) process are Indigo. Com, Rocket. Com, and Streakier. Com. These sites utilize social media, as well as its own online global presence to create exposure for the fund raiser’s campaign. To start a CB campaign, one must first know how much money one needs to raise, and the date by which one needs to raise it. One must also be able to sell one’s idea so that potential contributors can get behind the fund raiser’s passion. Pitch the plan, first to family, friends, and one’s own circle of support, then to the world at large.
The big three CB sites note that a minimum of 25% of the initial campaign funds will come from those in one’s circle of support. Once the campaign has gained that initial momentum, as shown by the amount of contributions raised; the project will then be seen as more valid by the rest of the potential contributors, who will then find it easier to support. That concept is likened to the restaurant theory: No one ekes to eat in an empty restaurant; as an empty restaurant implies that the food is not as delicious as, or the restaurant as clean as, or the service as good as, it is in a busy restaurant.
In reality, that’s not true at all, the busy restaurants Just have more people in them than the slower restaurants- people attract people. To use the restaurant theory to select a restaurant only to find that the food is awful is an eye- opening experience. In this respect, CB is the same- people attract people; and seeing a campaign that has already garnered support, is more attractive than seeing a campaign without support. Creating a video that communicates an idea effectively and succinctly is also important.
In fact, all three of the CB sites strongly suggest creating a viral-type video that gets the message across in an entertaining, but effective way, communicating all the pertinent information, but also causing the viewer to identify with the fund raiser’s passion and inducing the viewer to want to be a part of that campaign- that movement. It is also recommended that a “perk” is offered to the contributor so that they will receive something that reaffirms their decision to support the campaign, in return for their support.
A perk can be manufacturer; or a heartfelt thank you note from a patient raising funds to pay for an expensive medical procedure. Finally, it is recommended that during the campaign, the fund raiser should update the contributors on how the concept or project is evolving; keep the contributor in the loop, so to speak, so that the contributor can stay excited about the project, and spread the word. This is a very important aspect of the campaign; as one generates excitement about one’s project, that excitement spreads, which results in more support, more supporters, more excitement, and even more support.
Although grounding has been around a long time, today’s social media and the global reach that the internet provides has breathed new life into grounding. From the ultra-low tech grounding tactics used by the panhandler on the corner with his cause scrawled on a sign “Hungry, any help appreciated, God bless,” to the ultra-high tech grounding performed by savvy entrepreneurs and artists online on a global level, grounding is happening all around the world and is a viable solution to raise funds for any and all purposes.
Four of the more popular ways to finance a new business has been explored: the bank loan; personal finances; venture capital and grounding. Each method has its pros and cons, risks and rewards. Each method is suited to finance a business in a certain stage of development. The bank loan requires careful preparation and considerable paperwork, and is best suited for a business already in operation. The use of personal resources is a most popular method among business start-ups, and is confirmed by the statistics that note over 40% of new businesses are started in this way.
The venture capitalist looks for the business that promises a high return, and so again is best suited to a particular type of business that has established a track record. And the grounding method is useful to any and all types of businesses regardless of the stage they are in when they launch a campaign. Starting a new business can be complicated and getting it financed and off the ground can be even more complicated. Although all of the methods described above are equally complicated, each are also equally rewarding, especially if the business turns out to be a success.
