How To Finance A Business Video

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The majority of start-up or small businesses use limited

equity financing. As with debt financing, additional equity

often comes from non-professional investors such as friends,

relatives or colleagues.

However, the most common source of professional equity funding

comes from venture capitalists. These are institutional risk

takers and may be groups of wealthy individuals or major financial

institutions. Most specialise in one or a few closely related

industries.

Venture capitalists are often seen as deep-pocketed financial

benefactors looking for start-ups in which to invest their money,

but they most often prefer three-to-five-year old companies with

the potential to become major regional or national concerns which

will return higher-than-average profits. Venture capitalists may

scrutinise thousands of potential investments each year but only

invest in a few.

Different venture capitalists have different approaches to

management of the business in which they invest. They generally

prefer to influence a business passively, but will react when a

business does not perform as expected and may insist on changes

in management or strategy. Relinquishing some of the decision-making

and some of the potential for profits are the main disadvantages

of equity financing.

Banks are one of the most common sources of debt financing. There

are many other sources for debt financing including: savings, loans

and commercial finance companies. It is also possible to ask for

funding from family members, friends or colleagues, especially when

the capital requirement is small.

Traditionally, banks have been the major source of small business

funding. Their principal role has been as a short-term lender

offering demand loans, seasonal lines of credit, and single-purpose

loans for machinery and equipment. Banks generally have been reluctant

to offer long-term loans to small firms.

In addition to equity considerations, lenders commonly require the

borrower's personal guarantees in case of default. This ensures that

the borrower has a sufficient personal interest at stake to give

paramount attention to the business. For most borrowers this is a

necessary evil.

Article written by John Mussi.

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