There are several ways to finance a new business endeavour and drive its expansion. Almost everyone will at some point be required to bring in outside funds. Even if merely to replicate what is successful or to develop a source of emergency aid. The two basic alternatives are company debt financing and raising capital from equity investors.
Debt is a loan that must be repaid. Equity financing is what you receive when you sell a portion of your firm. They are quite distinct entities. This is not always an either/or situation. Sometimes, a combination of debt and equity financing may be optimal for your organisation. But it pays to know what each entails beforehand.
Debt Financing
Everyone is familiar with debt. All of us have likely taken out a student loan, a mobile phone subscription, a credit card, or a car loan or lease at some stage. Debt indicates borrowing. Typically, you will be required to repay in monthly instalments, over a certain length of time, at a set interest rate. Nonetheless, this might vary based on whether you are obtaining financing from investors, utilising lines of credit or working capital loans, or even employing new hybrid convertible bonds.
While recourse-free corporate finance is usually preferred, some new entrepreneurs may have to determine whether to utilise personal borrowing to launch their businesses.
Equity financing
To raise and gain funds, a business may offer ownership of the company by selling shares. In return for investment funds, the company is offering investors a share in the company. This can be accomplished through partnerships or funding from angel investors or venture capital (VC) companies.
Angels
Angels investors are often wealthy individuals or retired entrepreneurs who invest directly in other individuals small businesses. They are typically industry leaders who provide not just their expertise and network of connections, but also their technical and/or managerial skills. Typically, angel investors contribute between $20,000 and $100,000 in the early phases of a start-up. Institutional venture capitalists seek investments of $1,000,000 or more.
Venture capital
Firstly, remember that venture finance is not always appropriate for all businesses. One should be conscious from the outset that venture investors want technology-driven enterprises and companies with strong growth potential in industries such as information technology, communications, and biotechnology.
Friends and Family
Friends and family loans are a time-honoured approach to launch a business. While it may be more difficult to persuade investors or banks of the validity of your concept, family and friends usually support your endeavours.
They may be more likely to invest in your business. If you do approach family and friends for assistance, it is prudent to ensure that each of you has appropriate legal counsel, particularly if you are getting the money as a loan. The drawback? Borrowing money is an easy way to alienate friends and strain family ties. If you decide to go ahead in this manner, use caution.
Using your personal savings
In an ideal world, you would have enough personal assets to support your business and still have sufficient funds for all of your other expenses. But this is not true for the majority of us. It is essential to note that investing all of your own resources in your start-up is risky, particularly if you have dependents. Sustaining your and your family’s standard of living, paying for your house, sending your children to college, and planning for your retirement are other essential objectives.
Small Business Loans
Certain banks make loans to small firms, but traditionally, banks have been reluctant to lend to small enterprises. It might be challenging to qualify. There are, however, alternative finance businesses that may be better able to assist you launch your business.
The drawback? Some of these alternative loan providers engage in unethical practises. Ensure you know who you’re borrowing from prior to signing the agreement.
If you need advice on the best method of funding for you, we are here to help. At Local Tax Agent, we offer a comprehensive variety of bookkeeping services, including day-to-day transactions, bank reconciliation, and payroll for your staff. We are a professional company that understands all elements of bookkeeping to ensure your company books are tidy, balanced and reconciled for you. Get in touch with us for your accounting needs so you can focus on growing your start-up.
