Financing a Business Group members: Dave Rodriques Renard Crawford Adrian Newell Ryan Miller
Dept and Equity There are the two main types of financing for a business. These are Dept and Equity financing. Debt financing:tends to be the type of financing you receive from a traditional bank loan. Equity financing: tends to be financing you receive from venture capital into your business from outside investors.
Benefit of Dept Financing The benefit of debt financing is that it is finite and you will pay down the debt over time to a zero sum balance without any further obligation to the lender.
Disadvantages of Dept Financing A down stroke to debt financing is that traditional lenders will take a hard look at your business including how long it has been in existence, income from operation, expenses and will require hard assets for collateral for the loan. Additionally, lenders will most certainly want you (and any other principals of the organization) to personally guarantee repayments of the loan. Another disadvantage of debt financing is that your organization will be burdened with some other type of regular payment (usually a monthly payment) depending on the terms and conditions of the financing and this can absorb critical cash flow, especially with small business.
Benefits of using Equity financing A benefit of equity financing or venture capital is that you will be receiving money in exchange for equity in your business in the form of stock or some other form of equity like percentage of income or gross/net sales. A primary benefit of this type of financing is that typically there is no monthly payment requirement to investors. Instead, you are giving up ownership interest, most often, permanently. Traditional lenders, banks for example, will look at your business much differently than venture capitalist. Bankers want a zero-risk or near-zero risk position when they provide financing and will rely almost completely on the operating economics of the business with little regard for "potential future growth". They want to see strong cash flow backed up by hard assets before they do a deal--the ingredients that most small business lack or they wouldn't be seeking financing, right? Venture capitalist, on the other hand, tend to consider the management team and the potential future growth of the business more heavily than actual operating numbers, especially for small business with large potential but few sales and little or no operating history.
Capital Cash or goods used to generate income either by investing in a business or a different income property.
SHARES A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common/ordinary shares and preferred shares.
Debenture and Bonds Debenture and bonds are similar except for one difference. bonds are more secure than debentures. A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture but pays a higher rate of interest to its creditors and bondholders are paid low interest. In case of bankruptcy or financial difficulties, the debenture holders are paid later than bondholders.
CAPITAL INVESTMENT The term Capital Investment has two usages in business. Firstly, Capital Investment refers to money used by a business to purchase fixed assets, such as land, machinery, or buildings. Secondly, Capital Investment refers to money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business' day-to-day operating expenses. If you are seeking investors for your business, you will most likely find that interested investors prefer to make a Capital Investment, specifying what the money will be used for.
Working Capital Simply defined it is: The assets of a business that can be applied to its operation. The amount of current assets that exceeds current liabilities.
Venture or Start Up Capital Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.