Finance serves as the lifeblood of every business. The finance requirements of entrepreneurs can be sufficed by equity and debt sources. Equity refers to the contribution made by the shareholders in terms of the money they deserve. Debt refers to the money borrowed for running the business. Today we are going to take a look at the different avenues from which finance can be sourced by a new entrepreneur.
One of the easiest sources of finance for an entrepreneur is his savings. Whenever there is a requirement for capital in the business, the entrepreneur can tap into his assets inclusive of mutual funds, stocks, jewelry, or real estate for raising money. He can either take a loan against these assets or sell them off to arrange for funds.
Entrepreneurs often seek the help of their family and friends to gather funds for their business. Close acquaintances might be ready to lend finance as a loan or in exchange for an equity stake in the company.
Banks often provide loans to small companies and even have a separate department for that. However, each bank has a minimum criterion that has to be fulfilled before the loan can be reimbursed. In the case of sole proprietorship business, if the entrepreneur is stricken with credit card debt then banks will think twice before processing the loan. Some other criteria that the banks take into account are annual turnover, earning potential, and credit scores. Banks offer a variety of loans ranging from loans against property to term loans, and working capital loans. Entrepreneurs can choose the loan that suits them best.
Businesses might have suppliers who are ready to sell on credit ranging between one to three months. This serves as an excellent method for small companies that are trying to fulfill their short-term funding requirements.
Private equity is a special form of equity capital that is not listed on any stock exchange. Funds are raised by these firms from investors which are then invested in buying capital of small businesses and promising startups. However, the private equity firms acquire either a substantial minority position or a controlling interest in the company and try to maximize their investment value. As a result, the entrepreneur might lose the sole controlling interest over business decisions leading to conflict in days to come.
Venture capital firms are a category of private equity firms offering funds to companies in the nascent stage of their business cycles. These can be emerging companies carrying high growth potential. The venture capital firms derive an ownership stake or equity in exchange for their investment in companies.
Crowdfunding is a new form of financing where funds are raised by borrowing a small amount of money from a big group of people. This form of financing is project-specific and flexible proposals can be made by small companies according to their requirements. Entrepreneurs might take the money on loan and offer simple interest payments or offer equity against the money.
The different sources of funds mentioned above help in establishing, operating, and expanding business activities in days to come. Entrepreneurs need to select the source of funds carefully in order to get the best yields.