How can one obtain financing for a business?
To many people, the idea of starting a business will conjure up memories of past failures by themselves or these close to them, auctioning of their personal property due to the non-payment of loans, extreme stress, loss of personal freedom and working at odd hours.
That is to these who are young in it. These already in the game will also experience problems. These include managing the business through the various growth stages of its life. One of the greatest issues that managers and business founders must face is how they will obtain business financing.
We will, in this short expose, try to answer the often heard questions: how do I finance my new business and how will I see it through to maturity. The following are the most common ways of obtaining finance for your business:
Commercial bank loans
These are usually hard to obtain especially by individuals or businesses that do not have a proven track record. Banks refer to the need to lessen servicing costs of small accounts to deny them loans. However, some banks are lenient as long as set conditions are met.
You can look for banks that are aware of your specialization and while there, prove that your venture is actually low risk and achievable. Unlike venture capitalists, banks will want to finance low risk businesses. Therefore, it is in your interest as a borrower to explain that risk exists but that it is not alarming.
For established businesses, the process is easier. A mere presentation of audited accounts and off course, possession of collateral is a plus.
Obtaining financing from Angels
Obtaining money from angel investors, (family, friends and fools), means approaching affluent individuals who will provide capital for a business (www.wikipedia.com). Many of them have nowadays organized themselves into angel networks or groups in order to pool their capital and also share their various experiences. Accessing their financing will need a lot of networking by an investor.
Since angels usually bear high risks, they may require high returns on their input. Most professional angel investors will need proof that the return will actually be twenty or thirty times of the value invested. Though expensive, they are available to young ventures that may not be able to access bank and other traditional loans.
Venture capitalists
These are professional individuals whose primary desire is pool resources and invest in upcoming or troubled businesses. They will almost invariably look out for these that are in vibrant industries but are either poorly managed or are just lacking capital to finance their business activities. Anyone who has read the history of the Tisch brothers will understand how to obtain financing from venture capitalists.
From their escapades in the film, cigarette, hotels and real estate industries, these brothers were able to perfect the art of venture capitalism. In their quest to seek this type of financing, business owners should be very careful about the extent to which they want the financiers to control the business. It is dangerous to cede much control to them.
Other avenues
Other means of obtaining business financing apart from these mentioned include selling part of the owners’ equity in the company through Initial Public Offerings and private placement. It is also possible to sell an existing business’ assets for finance.
References
- http://businesssfinance.com/
- http://www.powerhomebiz.com/vol12/bankloan.htm
- http://www.businessfinance.com
- http://en.wikipedia.org/wiki/Angel_investor
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