Finance Information

How to finance a business is one of the main concerns that every new business person has to solve. There are two main ways of financing a business, equity financing and debt. The majority of start-ups 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 equity funding comes from professional venture capital. These are institutional risk takers and may be groups of wealthy individuals or major financial institutions. Most specialize in one or a few closely related sectors.

These investors are often regarded 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 concerns of becoming major regional or national, which will return higher than average profits. Venture capitalists May monitor thousands of potential investments each year but only invest in a few.

Venture capitalists have different approaches to managing the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not work as expected and may insist on changes in management or strategy. Giving up some decisions 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 of debt financing including: savings, loans and commercial finance companies. It is also possible to apply for funding from the family members, friends or colleagues, especially when the capital requirement is low.

Traditionally, banks have been the main source of financing for small businesses. Their main role was that of a short-term lender offering demand loans, seasonal lines of credit and single-purpose loans for machinery and equipment. Overall, banks have been reluctant to offer long-term loans to small businesses.

In addition to equity considerations, lenders often require personal guarantees from the borrower in case of failure. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the company. For most borrowers this is a necessary evil.

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