Published on February 19, 2014
Raising Capital for Start up or Small Businesses & Need for financial management
Financial Management in nutshell: In simple terms, Financial management means: To collect finance for the company at a low cost and To use this collected finance for earning maximum profits Raising suitable sources of finance Short term Medium term Long term Investing the raised funds Forecasting Evaluating current markets Risk assessment Dividend Distributing the financial gains amongst the shareholders
Funding types for different stages For many companies, fundraising is an ongoing (and seemingly never-ending) process. Understanding the different stages of funding will help the founders and other company executives better anticipate the company’s needs and the different sources of investment the company will need to seek. Let’s look at the types of stages of fundraising below: Seed capital - Seed capital is the money you need to do your initial research and planning for your business. Start-up capital - Start-up, or working capital, is the funding that will help you pay for equipment, rent, supplies, etc., for the first year or so of operation. Mezzanine (expansion) capital - Mezzanine capital is also known as expansion capital, and is funding to help your company grow to the next level, purchase bigger and better equipment, or move to a larger facility. Bridge capital - Bridge funding, as its name implies, bridges the gap between your current financing and the next level of financing.
Sources of Finance: Capital is the key to starting a business or expanding an existing business. You can have a great concept, ideas, and people willing to work hard and give their best but if you don’t have capital it is very hard to succeed. Raising money requires a logical process and new funding doesn't happen instantly. Raising equity capital at various stages of a business's development is particularly tricky and requires proper strategies. A number of alternatives are available, and choosing the right one for you can help fuel the success of your company. Considerations for raising equity capital can include, among others, personal investment, investment from partners, or contributions from outside sources such as investors or venture capital providers. Some sources for raising capital are Internal Source Personal savings Retained profit Working capital Sale of asset External Source Long term sources of finance Medium term sources of finance Short term sources of finance Inorganic growth
Sources of Finance: Long term Medium term Long term sources of finance sources of finance sources of finance Short term Short term Inorganic Inorganic sources of finance growth sources of finance growth ••Sharecapital or Share capital or equity share equity share ••Preferencesshare Preferences share •Retained earnings •Retained earnings ••Debentures/bondsof Debentures/bonds of various types various types ••Loansfrom financial Loans from financial institutions institutions •Loan from state •Loan from state financial corporations financial corporations ••Loansfrom Loans from commercial banks commercial banks •Grants from •Grants from Governments Governments ••Venturecapital Venture capital funding funding ••Assetsecuritization Asset securitization ••Tradecredit Trade credit ••Bankloan Bank loan •Bank overdraft •Bank overdraft Lease Lease ••Advancesreceived Advances received from customer from customer ••Variousshort term Various short term provisions provisions •Preference shares •Debentures/Bonds •Public deposit/Fixed deposit for duration of three years •Commercial banks •State financial corporations •Lease financing/hire purchase financing •External commercial borrowings •Foreign currency bonds Merge Merge Take over Take over Alternative sources of finance •Chit fund •Pledging gold •Asset finance •Mortgages •Business Angels
Long term finance: Long term finance: Advantage: Advantage: Stability Stability Cost of capital Cost of capital Disadvantage: Disadvantage: Long term agreement Long term agreement Risk Risk Short term finance: Short term finance: Advantage: Advantage: Emergency funding can be paid Emergency funding can be paid Plug cash shortfalls Plug cash shortfalls Easier to secure Easier to secure Lower interest rates Lower interest rates Disadvantage: Disadvantage: Immediate effect of raising rates Immediate effect of raising rates Additional assets to be pledged Additional assets to be pledged Not adequate Not adequate
What to consider while raising capital for businesses Proper estimation of total financial requirements The finance manager must find out how much finance is required to start and run the company. He must find out the fixed capital and working capital requirements of the company. His estimation must be correct. If not, there will be shortage or surplus of finance. Estimating the financial requirements is a very difficult job. The finance manager must consider many factors, such as the type of technology used by company, number of employees employed, scale of operations, legal requirements, etc. Proper mobilization Mobilization (collection) of finance is an important objective of financial management. After estimating the financial requirements, the finance manager must decide about the sources of finance. He can collect finance from many sources such as shares, debentures, bank loans, etc. There must be a proper balance between owned finance and borrowed finance. The company must borrow money at a low rate of interest. What is the value of the company? The value of a company is important because it is the basis for determining the "cost" of the new capital when seeking equity additions to the capital structure. Generally, a valuation considers four questions: How much is the company worth today? How much could it be worth in the future? How long will it take to create the future value? What is the likelihood of achieving success? Understanding how your company will be evaluated and being able to affect the valuation positively can enable you to get higher valuations and retain greater ownership of your company when the investment is funded.
What are the legal responsibilities to potential investor? Business owners seeking funds from individual investors are required to provide forms and specific factual information in understandable language to potential investors so that they have the ability to evaluate the investment and determine whether it is right for them. Seeking and paying for competent legal advice when soliciting, negotiating, or contracting with investors or lenders is mandatory for prudent business owners How to negotiate a win-win agreement? Whether for a startup or an ongoing operation, involves two parties: the investor and the company. Negotiations between investors and business owners involve, at minimum, the following factors: •The Amount of Capital Invested. •The Timing of the Investment. •The Return on Investment. •The Timing of the Return to the Investor. •The Certainty of the Return. •Control. Conclusion: Many financing professionals claim that the rigorous, stressful process of raising capital for a new venture ensures that only the best companies receive funding. Persistence - the willingness to learn from rejection without losing enthusiasm - is critical. Every idea, every company can be analyzed and deconstructed to the point it is unworkable.
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