NEED FOR FUNDING
Need For Funding
Why Do You Need Funding?
Broadly there are three main purposes for raising angel and venture capital. These are:
- to start a new business to take a new product to market
- to develop an existing business;
How Much Money Do You Need?
Seeking money for start-up, and small and medium-size businesses is always a great
challenge. Mistakes normally occur mainly in two ways:
- Seeking too little or too much money
- Seeking the money from the wrong sources.
To determine how seed money your business will need, you must first answer the question why do you need the money. Every business is different and is at different stages of development and so there is no single formula to determine the total funds required.
The most effective way to calculate the start-up costs for a new business is to use a worksheet that lists all the various categories of costs. This would include but onetime and recurring costs until revenue starts
On the other hand for an ongoing business seeking additional funding some of the important questions to ask, to decide the level and amount of funding required, are?
- What has led to your thought process for seeking additional funding? Was it due to the business cycle or state of market / industry? Do you need money for growth?
- Do you need money from external stakeholders?
- Do you need money to expand or as a support for cash flow problems faced by the business?
- How soon do you need the additional funding?
- How will you use the money?
- Do you have plan for using the money? Do you how you will reward or compensate the investor?
Debt VS Equity
There are two types of financing: equity and debt financing. The principal advantage of debt financing is that the business owner (borrower) is able to maintain and avoid dilution of his or her equity interest (ownership, control, and upside potential). In addition, the interest costs of debt financing are known and debt holders have no claim on future earnings, or growth and success in the business once the debt is paid off. The main disadvantage of debt financing is that the business owes the debt and must pay it back, principal plus interest a scheduled basis. Some commercial lenders require personal guarantees from owners as a condition to making loans. Required debt payments reduce cash flow and profits, and dire consequences can follow from noncompliance with debt covenants For example, failure to make a timely payment can result in losing control of the business to debt holders, sale business’s assets on default and foreclosure.
Equity, on the other hand, is long-term capital the nature of “ownership” By adding to net worth, equity improves a business’s creditworthiness Additionally, an equity investment from a sophisticated financing source connotes external market validation of the company’s business model by a objective outsider.
Euity investors, unlike many commercial lenders, usually do not impose personal liability on owners and do not take a security interest in the company’s assets. They do have an expectation of growth that imposes responsibilities on the entrepreneur and his management team. The unlimited upside benefit and potential of equity, as opposed to debt with its fixed and limited payments and returns, is what motivates venture capital investors to fund emerging businesses.
Of course, debt and equity funding are not mutually exclusive. Most businesses, over time, utilize a mixed balance of both. Some angel and venture capital investors use convertible debt, debt features and bridge loans as well.