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Funding - How Much Where From? |
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Written by David Willetts
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At various times throughout the life of a business, funding will be required. The first funds the business may source may be provided by.....
At various times throughout the life of a business, funding will be required.
There are often difficult choices to be made in selecting the appropriate form of funding as well as the appropriate level of funds to successfully add value the business. The type of funding may not initially appear relevant.
The first funds the business acquired may typically have been provided by the owner or be in the form of a loan from the bank. As the business grows and needs more finance to support new marketing initiatives, new product development or the like, the sums involved are greater and may be beyond the means of the business owner. Furthermore the bank may require a level of collateral alien to the business owner’s wishes.
At this time the owner may seek an alternative source of funding. It may be that business angels or venture capitalists could be approached. However, the business owner should understand that striking a successful deal with such parties will almost certainly dilute his/her interest in the business.
There may be no option for a young growing business with much potential but little net worth but to seek such a partner who will fund the business in the immediate future. In such circumstances it is also important to consider that the business should benefit, not only from the funding provided, but also from the advice or contacts the angel or capitalist may offer to the business.
The key issue for entrepreneurs to understand is that the larger the funds required generally increases the level of risk, and the rewards for all persons providing funds on that basis will therefore be higher. Normally business angels and venture capitalists will expect the value of the business to increase substantially, so that the value of their shareholding will grow accordingly.
Had the funding originated in the form of a bank loan then after the loan had been repaid the entire share capital of the business would still belong to the owner. All of the increased business value would then be enjoyed by the owner.
Other forms of funding that may be considered include invoice factoring and if appropriate leasing or hire purchase. In addition to the choice of funding provider the level of finance raised should be satisfactory to meet the business needs.
Frequently if insufficient funding is raised at the outset major problems will arise later. Projects may be delayed, the business growth will stutter and more importantly investors and lenders will become concerned and disillusioned with the owner’s performance.
If a sound business plan exists then additionally funding may be raised. The business angel or venture capitalist may be prepared to increase their level of investment, but at what cost? The level of risk has increased so it is reasonable to assume a higher percentage of the business may be negotiated.
Further should the financial problem be grave the competency of the owner may be brought into question.
Author bio:
David Willetts is a qualified accountant and an Associate of the Institute of Business Advisers. More details on David’s background and experience can be found at DAW Consulting Limited.
Also if you are seeking a solution to your business problem then visit David's site at http://www.sme-business-solutions.com for your on line business resource.
He has headed finance functions and held operational responsibilities within small and large organizations.
He now works with directors and owners of companies in developing solutions to the problems found in business life.
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