DR EMAD RAHIM – ENTREPRENEURIAL FINANCING
While entrepreneurs are usually filled with ideas and passion, they are often starving for capital to jump-start and grow their business.” Here is a comprehensive summary of financing options for the Early Stage and their pros and cons to the entrepreneur and the company. Debt Financing: The business owner raises money by taking out loans and paying them back using an installment plan with set interest rates. This type of financing is not dependent on whether or not the business succeeds. If successful, the owner is responsible for paying back the loans, but he/she keeps all of the profits and control of the company (Field, 2007).
Customers and Suppliers: Customer financing is when customers fund the product development in exchange for customization. Supplier financing is when suppliers extend payment terms, which effectively increases your working capital. Another form of supplier financing is when a supplier holds inventory, in exchange for a guaranteed payment by a certain date (Field, 2007).
Equity Financing: The business owner raises money by selling shares or ownership in the company in exchange for cash (Field, 2007).
Venture Capitalists: Investment organizations provide money and advice in return for partial ownership of the company. This means that the owner must be willing to give up control over major decisions and be willing to sell the business, or have an IPO within seven years of receiving an investment (Field, 2007).
Personal Loans: The business owner borrows money from family and friends. At the very early stages of any startup, entrepreneurs tend to raise money from relatives, colleagues and other people they know well. This type of loan will give quicker access to funds with fewer stipulations (Field, 2007), but could threaten the relationship if the business fails and you cannot repay the loan. Banks: The business owner uses traditional commercial banks to borrow money. They can be a good source for loans ranging from microloans of hundreds of dollars to major loans of six figures. Banks provide an option to open a line of credit where you don’t need to pay back interest until you reach your maximum. Banks require much more proof of financial responsibility, with the owner often having to demonstrate that they already have established credit in order to be eligible for a loan. Banks can also take longer to process loans (Field, 2007). Unless the owner has a good credit rating and a sizeable bank account, banks will hesitate to lend money to start a business. Grants: An award of financial assistance given out by the federal government or an organization that does not have to be paid back. Grants are highly competitive and have strict guidelines on how the funds are spent (Field, 2007). Bootstrapping: An Entrepreneur uses whatever resources available to get the business off the ground. While a large part comes from personal savings and homeequity loans, credit cards are also used. (Field, 2007).
Regardless of financing option, emerging entrepreneurs should undergo strategic planning to determine: (1) the mission and goals of the company; (2) the direction that the business will take; and (3) how the business will achieve its mission and goals. At the basic level, the entrepreneur needs to make choices based on the available options for these issues. As a starting point, it is important to structure the thought processes so the entrepreneur does not get lost in the forest and to ensure that all the relevant issues are covered. Having a clear strategic plan will increase the likelihood of having a successful venture.
The size of the startup, asset structure, organization type, growth orientation, and owner’s characteristics are all relevant to how the company should get financed.”
Biography and Reference ★ Emad Rahim, DM, PMP is Dean of Business and Management at Colorado Technical University. Follow him on Twitter @CTUBusiness ★ Field, A. (2007, October, 18). Great ways to finance a startup: From credit cards – hey, it worked for Google – to your own customers and suppliers, there’s money out there if you get creative. Fortune Small Business. Retrieved from the Business Source Premier database.
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