This is where a lot of entrepreneurs spend their time thinking about where they are going to get financial capital to start their venture. The truth about it is that it could be less intimidating and difficult as you think. Some people are opened to the belief that they must get rich in order to have the financial capital to start their business. It is not rich people that start up a business. It’s just that the rich people have the opportunity, financial capital, and means to do what they have to do and have the experience they want to have. It is individuals who have not reach that financial success that wants to start up a business. One of the social aims of starting a company is to reach some level of financial independence and also have financial capital.
SOURCES OF FINANCIAL CAPITAL
In Europe or the United States, a lot of entrepreneurs goes to meet a venture capitalist or some professional investors for financial capital. In practice, there is a huge kind of fund that goes into a business. This kind of fund is used by people that are pursuing billion-dollar opportunities. Such as high-tech companies, automobile machines, and telecommunication etc. While some make use of their personal savings as their financial capital to get the ball rolling with their venture. It is not that they have substantial money.
Typically, before a bank or financial institution, friends and family can lend you money. They will like to know how much you have as your financial capital to invest in your business. It might be a small money but the truth is that having some part of the money shows commitment and put on a belief that you believe in your business idea. This will pave way for people to invest in your idea and with this your financial capital is ready.
- Personal savings 55%
- Family members 10%
- Partners 7%
- Personal charge cards 6%
- Bank loans 4%
- Venture capital 4%
- Friends 3%
- Angels 3%
- Mortgaged property 3%
- Other 5%
In general, sources of financial capital are divided into ‘debt or equity’ and ‘internal or external’ sources which include – personal funds, friends, and families, loans from banks. There are three major sources of financial capital;
- Venture capitalists (VCs),
- Business angels (BAs),
- Corporate venture capitalists(CVCs).
VARIOUS APPROACHES OF FINANCIAL CAPITAL
1. DEBT FINANCING
Debt financing is obtaining financial capital for the company from borrowing and repaying it with an additional interest fee on the financial capital borrowed. The common debt sources are;
I. From Commercial Banks
This is the main source of short-term financial capital for entrepreneurs. This type of financial capital is provided to the entrepreneurs in exchange for a collateral. It can be personal assets of the entrepreneurs (such as a car, properties, stock or bond, or business properties like the building of the venture, equipment). The principle here is getting the money from a bank is that the collateral should have more value than the amount an entrepreneur borrowed from the bank.
II. Trade Credit Financing
Trade credit is the acquisition of supplies by the customer on an account basis, in which the customer pays the supplier later during an assured period of time. Usually, these time periods are 30, 60, or 90 days.
III. Account Receivable Financing
It is all about getting the financial capital required by selling goods or services on credit to the creditworthy costumes and then ask for the fee later. Sometimes, especially when government bodies are involved, entrepreneur get an account receivable loan from a bank, by selling the accounts receivable at a value below the face value of it.
IV. Cash Flow Financing
The typical ways banks lend money to entrepreneurs and companies are called “Conventional bank loans”. These are conventional commercial loans, long-term loans, character loans, and character loans. Let’s check them out briefly;
2. TYPES OF LOAN
I. Installment loan
These kinds of loans can be given to a venture which has a clear record of sales and profit. This kind of loans is spent in working capital needed for a period of time. Duration of instalment loans is as long as 30 to 40 days.
II. Conventional Commercial Loans
These self-liquidating loans similar to instalment loans are used for specific periods of time like seasonal financing and for providing inventory which straightly goes to the company for 30 to 90 days.
III. Long Term Loans
These types of loans which are normally available just for big companies can last up to 10 years. The incurred debt to the company is paying back based on a fixed interest rate and specific and constant schedule. Sometimes, the payment schedule financial capital starts from the second or third year of the loan with profit only in the first year.
3. EQUITY FINANCING
This is getting capital for the company in exchange for ownership. Many entrepreneurs prefer to raise money through equity rather than debt. It is alluring since it feels like free money at the startup. The entrepreneur doesn’t need to give anything as a collateral and usually no obligation to repayment and interest payment. Apart from this, there are other incentives such as equity investors, business experiences, and lessons, having trusted mentors and a good potential board member. Most frequently a source of financial capital is internal sources which are created within several channels such as profit, the sale of assets, accounts receivables, extending payback periods, and reduction in working capital.
I. Personal Funds, friends, and family
Entrepreneurs rely on various sources of financial capital to finance their venture. Using personal financial capital is very important in attracting external financial resources such as banks, privates’ investors, venture capitalists. A major source of personal financial capital can be savings, life insurance, or mortgages on houses or cars. It is very important for venture capitalists to see the entrepreneurs start their venture on their own personal financial capital since it shows and will guarantee the commitment of the entrepreneurs to the venture. Friends and families are another conventional source of financial capital that is limited and their expectation of getting back a good return is set in an informal way. Friends and families are labelled as informal investors that often are referred as three Fs which are friends, families, fools.
II. Business Angel
Business angles (BAs) or private investors are those who can be wealthy friends and families, or another individual. Those who are looking for investment opportunities and use advisors and experts to make their investment decisions. Business angels are those who invest their capital in fresh ventures and are commonly entrepreneurs who have liquidated their company and are willing to invest their money.
It is advisable not to compete with venture capitalists (VCs) on deals, however, they invest in seeding stage hoping to enable the venture to attract future capital from VCs. Or, they invest in ventures whose growth rate is too slow to attract the VCs. BAs are very proper for those entrepreneurs who are seeking for an informal relationship and a light system of reporting requirements to the investors.
III. Venture Capitalist (VCs)
A venture capitalist is an investor that provides start-up ventures with the potentiality of success with financial capital or helps small ventures to grow that have not access to sufficient financial capital in order to get high fortunate returns. Venture capitalists are targeting the businesses they are familiar with in hope for getting the opportunity to own a large percentage of the industry to enable them to direct the industry.
They invest outside equity from professionally managed pools of money. They get their financial resources from different parties and entities, which mainly are institutional investors that are performing in venture capital firms.
Also Read: Report Writing – A unique style
What is Seeding stage?
Seeding stage is a stage in which financial capital is used for developing the business concepts and related parts at the startup to enable it to attract start-up finance and the time frame determined for cash out is about five to seven years, and at last but not the least, the expected return is 35 to 50%. It is important to say that since the rate of high growth for BA backed ventures are rare, the main exit strategy taken by entrepreneurs is commonly the trade sale. And, it is usually negotiated between entrepreneur and business angel directly.