Finance is the lifeblood of a successful entrepreneurial or start up business. Usually, access to funding determines whether an entrepreneurial business dies in the infancy or succeeds. The current report is therefore devoted to highlighting the financing options available to start up businesses.
Equity financing is major source of financing for start up businesses. The equity can be either private or personal. Personal equity is the business promoter’s own financial investment in the business. The most common advantage of using personal savings for business expansion funding is that it is easy to access. It does not require unwarranted long applications to complete; neither does it demand any paperwork nor interest payments. It guarantees owners full responsibility and control of the business. Private equity on the other hand is a fund donated by individuals or organizations which are not the business owners. It thus includes sourcing funding from family and friends, business angels, and venture capitalists.
i. Angel investors
Also known as business Angeles, they are private entity investors who pump capital in viable and profitable businesses (Ryan and Hiduke, 2010). Although they seek active managerial participation in the business, their contribution of business experience and know how substantially boosts the performance of start up businesses (Ryan and Hiduke, 2010). They anticipate faster returns on their investment in businesses they invest in. In effect, start up businesses may source funds from Angeles investors simply because they provide considerable good amount of money, usually to a tune of $1 million. They also present businesses which they invest in with sound networking opportunities (Ryan and Hiduke, 2010).
ii. Venture capitalists
A venture capital is the money invested in high performing innovative businesses usually for stake in the company. It forms major source of finance for innovative start up businesses. Just as Angel investors, besides their massive funding, venture capitalists come with massive wealth of expertise and support that guarantees success for start up businesses. Venture capitalists funding is however tome sensitive. They demand quicker return on their investments. Nonetheless, its acceptance presents potential loss of control and independence of business owners (Ryan and Hiduke, 2010).
iii. Family and friends
Family and friends stand is also a source of finance in situation when personal savings are insufficient. It is appropriate an appropriate source of funding as it hardly demand equity stake in the business. Its upside is that it involves less contractual or legal strings, very convenient and may be available quickly (Ryan and Hiduke, 2010). However, it may be unreliable and family members may be unprofessional.
Debt financing
Commercial bank loans
This is a form of debt financing. Debt financing through commercial bank loans is an appropriate source of funding for start up businesses. Commercial banks can offer short term, med term or long term capital funding. In addition they are in a position of financing all asset needs; equipment, working capital as well as real estate (Ryan and Hiduke, 2010). Therefore, the business can source funding from commercial banks to enable it generate adequate cash flow to help cover payment of interest. Loans from commercial banks are sure of funding as commercial banks scarcely have influence on the business control or turn over a company’s equity. Also, start-up businesses are able to get unsecured loans. It is reliable, convenient and does not demand stringent collaterals. The most appropriate commercial loan is the European Investment Bank (EIB) loan scheme which offer attractively priced medium term finance specifically for entrepreneurial businesses (Ryan and Hiduke, 2010).
Grant aid
Grant is also a source of finance for a startup business. A range of supports and grants are available for entrepreneurial viable businesses from the state agencies. The grant can be secured through Small Business Innovation Research Programs. Grants programs are basically designed for innovative businesses. Grant aid is better source of financing option since it is free money (Ryan and Hiduke, 2010).
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Financing for the Small Business ,n.d., Retrieved 25 Mar. 2012 from <http://archive.sba.gov/idc/groups/public/documents/sba_homepage/pub_fm14.pdf>
Financing Options for a Small Business: Finding the Right Funding, 2012, StartupNation, Retrieved 25 Mar. 2012 from <http://www.startupnation.com/business-articles/890/1/AT_FindingFundingThatsRight.asp>
Ryan,J.D., & Hiduke, G. (2010) Small business and entrepreneurs business plan. Mason. Cengage Learning
