Archive for category Business Financing
Commercial Financing for Business
Posted by admin in Business Financing on May 25, 2011
The Need for Commercial Financing
The Economic Perspective: Financing a business is very different from obtaining a loan for personal reasons. From the economic perspective the expenses that have to be borne by a business can be broadly classified into the following categories: Fixed Costs and Variable Costs. Fixed costs remain the same regardless of the level of production. In other words, whether or not a business is in operation, the amount of fixed costs will remain the same. Expenditure on machinery and equipment is an example of a fixed cost. Variable costs, on the other hand, change depending on the level of production. Variable costs are directly related to the level of production. The cost of raw materials is an example of variable cost. Hence, from the point of view of an economist: Total Cost = Total Fixed Cost + Total Variable Cost
The Accounting Perspective: From the perspective of accounting, costs can be classified as implicit or explicit. Explicit costs are expenses which can be accounted for in monetary terms. Both, rent and wages paid, are explicit costs. On the other hand, a businessman who does not pay his wife for assisting him in day to day workings of a business, is said to incur implicit costs. Hence, for the purpose of accounting, total cost can be defined as: Total Cost = Explicit Cost + Implicit Cost
The above discussion clearly illustrates the importance of commercial financing.
Commercial Financing for Business
Commercial financing is needed, not only during the start up phase, but also during the development, operating and growth phase. Let us take a look at the financing required during these two phases.
Pioneer Phase or Start Up Phase
Seed Capitalists: Seed capital is usually provided by friends and family members of an entrepreneur. This funding is necessary for activities like market research in order to test the feasibility of the business venture. The amount of seed capital is usually small.
Angel Investors: A business can also be funded during the start up phase by angel investors. Angel investors are affluent people who finance a business for reasons best known to them. In other words return on investment or ROI may not be the sole criteria for funding. Angel investors may not demand participation rights in the business and they generally provide finances on a small scale.
Venture Capitalists: Venture capital is provided by institutional investors like banks, hedge funds and pension funds, who believe that the enterprise is capable of generating long term profits. Venture capitalists usually come into the picture after the business has established a few basic operations. Since venture capitalists invest other people’s money, they are very particular about the return on investment (ROI). Moreover, they demand participation rights in the form of preferred stock, and they may also be a part of the Board of Directors. Read the rest of this entry »
How to Raise Money for a Business
Posted by admin in Business Financing on May 25, 2011
Anyone looking to start a company or business venture of their own, needs to know how to raise money for a business. The capital is one of the first things that need to be taken into consideration when one is setting out on a business venture, and there are many different sources to obtain this capital. It is not necessary to stick to one particular source rigidly, even a combination of various different sources can be made use of.
Anyone who is wondering how to raise money for a restaurant, a small business, an advertising agency or any other small-scale venture should keep these methods in mind. Approaching the right people for the money is vitally important for the success of the business, and if this is not catered to properly, the business will be doomed from the very beginning.
Personal Savings
This is the most obvious source of money for starting a business. If you have saved up enough money over the years, go ahead and make use of it for your business. You will not be answerable to anyone, and you will not have to worry about repaying someone. If you choose this option, ensure that you are not using all your savings though. Many people neglect this option of how to raise money for a business because if they lose the money, they will have nothing left to live on.
Venture Capitalists
This is the next most obvious source for your potential business. Venture capitalists are professional agencies who put in money, or venture capital, into an upcoming business. What they get in return is either a share of the business, or a share of the profits, or pretty high interest rates. It may sound like exploitation, but this is one of the best ways to get money. Venture capitalists are always looking for new and innovative business ideas that are likely to succeed.
Angel Investors
These are a refined form of venture capitalists, but many people think they mean the same thing. Angel investors are less demanding than venture capitalists, and are with your business in the long run. Usually, they are someone who you would know personally, and they are simply looking for ways to get a higher return on their investment. How companies raise money depends a lot on the nature of the business, and the method of entrepreneurship adopted. Angel investors also help out the business by providing some guidance and mentoring. Read the rest of this entry »