This article are provided for information purposes only, and are not intended as legal advice.


What type of funding are available for your new business?

December 21st, 2009

There are several options that entrepreneurs can choose when they are looking to either buy a business, buy a franchise or expand their current business.  It is important to look at al options and then select the one which most suits your situation.

 

Debt financing

  • no equity dilution
  • in the current business environment, the financial institutions/banks will require personal and business guarantees
  • will be closely monitored by the financial institution
  • may not be able to obtain as much as you believe you need in the current market conditions
  • unfortunately, financial institutions based their lending on what you have done in the past and not what you are about to do in the future unless you are in asset based lending.  Traditional lending looks at your historical financial statements
  • may not have sufficient working capital to deal with very large new customers
  • interest is deductible for tax purposes
  • monthly payments may be fixed

 

Equity financing

  • appeals to venture capital firms
  • angel investors
  • institutional investors
  • in order to qualify, the business owner will require a comprehensive business plan, have a good personal credit, have great business ideas and have the ability to present those ideas, the business plan must be realistic and shows that you have done research preparing the plan
  • must show an excellent return on the investors cash
  • you are now giving up equity and also may have restrictions on what you can and cannot do in the business
  • must report to a board probably monthly
  • if you have never reported to anyone before, this may be difficult until the entrepreneur realizes the benefits and knowledge of the board members
  • investors are expensive to get rid of and most want out in 5 to 7 years
  • entrepreneurs always feel that they have a great idea and the person with the money must pay dearly for their idea.  The fact that you need someones money to take you to the next level is not important, you feel that your idea is often worth far more than the market value of the business and often investors walk from the investment opportunity because the investor has become too greedy and believes that his business is worth far more than it really is.

 

Conclusion

 

There are many different financing opportunities to review and entrepreneurs should weigh the pros and cons of each opportunity and once you looked at each option, select the one which will provide you with the most opportunity.  Equity financing allows you to grow and provides the working capital that the banks will not fund so that you can secure those new large customers.  Buying out the investors over the long term will not be tax deductible and will be expensive, especially if your business is successful.


Filed under: Financing a business — Gary Landa @ 10:36 am


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