Sources of Finance for financing growth

WHAT CHOICES DO YOU HAVE TO RAISE FUNDS?

1.  DEBT FINANCING involves a loan that will accumulate future interest.
2.  EQUITY FINANCING involves accepting a lump sum in exchange for selling the future benefits and profits of your business to investors.

WHAT MIX OF DEBT/EQUITY IS USED IN A BUSINESS LIFE CYCLE?

1.  SEED STAGE
WHAT IS IT?  When your business is just a thought or an idea
FINANCIAL SOURCES:

• Family and friends
• Private savings
• Credit cards:  usually much quicker than waiting for a loan approval.

2.  START-UP STAGE
WHAT IS IT?  When the company has officially launched.
FINANCIAL SOURCES:

• Banking, typically the first option of small business owners.
• Small, community banks.
• Leasing:  paying a monthly payment for renting assets like equipment or office space.
• Factoring:  paying an advance rate to a third party (factor) in exchange for cash.
• Trade credit:  when a supplier allows the buyer to delay payment.

3.  GROWTH-STAGE
WHAT IS IT?  When a business has successfully traded for a period.
FINANCIAL SOURCES:

• Angel investor: a wealthy individual who hands over capital in return for ownership equity.
• Venture capital funds: large institutions seeking to invest considerable amounts of capital into growing businesses through a series of investment vehicles.
• Initial public offering (IPO):  the sale of equity in a company, generally in the form of shares of common stock, through an investment banking firm.

4.  MATURE STAGE
WHAT IS IT?  When its business has an established place in the market.
FINANCIAL SOURCES:

• Capital market securities such as common stock, dividends, voting rights.
• Bonds - loans that take the form of a debt security where the borrower (known as the issuer) owes the holder (the lender) a debt and is obliged to repay the principal and interest (the coupon).
• Commercial paper -  a money market security issued by large banks and corporations for short-term investments (maximum nine months) such as purchases of inventory

Key terms

Angel investor:  a wealthy individual, often a retired business owner or executive, who hands over capital to a new business in return for ownership equity.

Venture capitalists:  commonly large institutions seeking to invest considerable amounts of capital into growing businesses through a series of invesmtent vehicles that include state and private pension funds, university endowments, and insurance companies.

Commercial paper:  a money market secuirty issued by large banks and corporations for short term investments (maximum nine months) such as purchases of inventory.  These unsecured IOUs are consideed safe, but returns are small.

Factoring:  describes a loan by a third party (factor) given in the form of cash (often within 24 hours) for accounts receivable.  The borrower pays a percentage of the invoice.