Funding & Investors – Types of Financing That Are Available
In order to fund a start up business the typical scenario is that the company founders approach funding & investors. While most new businesses are ideally supported by their own sales team, there may be other times when funding is needed from external sources. When funding is sought from outside sources, the business can still follow certain standard procedures in order to make sure that it receives adequate investment back. A business needs to understand the various types of funding that are available to it before it can determine how best to use the funding it receives.
The first type of funding that most new businesses will seek is seed funding. Seed funding is provided by private funding sources in exchange for shares of the new business. The type of investor that a company seeks depends on whether it seeks an initial private placement of capital or has already obtained funds from more formal investment sources such as venture capital, commercial paper, and other types of secured loans. Private investors typically have a lower risk appetite when it comes to new business introductions because of the lack of experience. However, some private funding sources do have an investment grade rating and are able to provide investments with a decent return on investment.
Seed financing provides a simple method of obtaining investment capital for a company. Many companies that are seeking funding are small or new, and seed capital is often used as a means of obtaining small amounts of money to help the business meet expenses and obtain a foothold in the rapidly growing business sector. While this method is commonly used for small companies, there are some successful ventures that were provided with significant seed funding from an investment source that was more than likely a financial institution. Seed capital is a great option for new businesses that are in need of the funds to meet significant expenses and move quickly, but investors should be cautious when it comes to working with new businesses that are based entirely on seed funding.
Another type of capital that new companies may seek is debt financing. Debt financing provides a business owner with a loan that is usually given based on the equity value of the business. This type of financing is not recommended for a number of reasons, the most notable of which is the fact that the credit rating of the company is not likely to improve as a result of the business receiving a large debt financing. The cost of this type of financing often comes at a very high cost for the business since the interest rate is usually quite high, and the terms of repayment will generally not prove favorable in the future.
Private investors must also be wary of working with new businesses that are seeking funding based on a venture capital basis. Venture capital is provided by private individual investors who are typically experienced in the business world and have been personally investing in a number of successful businesses for several years. While this type of financing can be a good choice for new ventures that are growing and have a solid chance of success, this type of funding is generally not provided to those companies that are facing bankruptcy or other serious challenges. In addition, while many investors are willing to provide this type of funding, it is important to note that there are some risks that are involved in this financing.
As was previously stated, there are a number of different ways that an investor can obtain funding for their business. However, it is important to understand each method so that you can make the best decision regarding which one to pursue. It may be helpful to work with a small business consultant to help you determine which method is best for your business’s needs. This type of consultant can provide you with the advice and information that you need to make the best decision regarding your funding needs. Additionally, these consultants can assist you in developing an effective business plan that is designed to maximize your profits and help you to meet your business goals.
