Business Article - Raising Finance
A majority of companies will reach a point where the current financial status is not adequate enough to cover a planned investment. Acquisitions, buying out a company, expansion, and capital equipment are all examples, often leaving the business owner in a position of needing to raise finance. Startup companies are often the most needy and have the hardest time convincing investors to invest. There are many different methods of raising finance, and careful consideration must be made before a method is decided upon.
Before approaching a resource for financing, a business plan will need to be devised. The business plan will serve multiple purposes, the first of which is laying out the functioning and purpose of the corporation. A business plan will also be used to identify the purpose and actual need for raising finance. Potential investors will use the business plan as the base analysis for whether or not they want to take a risk with the company.
There are many ways to make a business plan, but certain information should be included. Often, a good business plan includes:
- profile(s) of the companies founder(s) and anyone else in a high position
- statistics for sales
- list of current or potential clients and customers and the current or projected demand
- list of all major competitors
- publicity received
- product information
- all research information
Once a business plan has been devised, potential investors will need to be approached. There are several different types of investors, and each has their own pros and cons.
Raising finance will leave the company in one of two different positions: debt or equity. Debt is the result of bank borrowing. Interest payments and certain repayment demands by banks put the company in a position of debt. The bank becomes a very large part of the company, holding the ability to place the company into bankruptcy should it fail to make timely payments.
Equity, on the other hand, means that the investor is accepting the possibility of failure on the companies part, while simultaneously maintaining the right to higher profits than other shareholders.
Both methods of borrowing have upsides. Raising finance from a bank has the potential for higher finance, but places the company in a position of increased vulnerability. Likewise, equity allows another company to become a position of authority in your own. Allowing the investor to have too large of a position in the company could also place the borrower in a precarious position.
The finance available will also be determined by the time frame needed. There are three different types of financing: short term, medium term, and long term.
Short term financing means the investor will be repaid in a relatively short amount of time, and is usually reserved for small monetary needs. Most short term finance is secured by means of bank over drafting.
Medium term financing is usually reserved for when the borrower requires a moderate amount of finance and requires a decent amount of time to pay back. Raising finance for medium term is usually done via bank loans.
Long term financing is usually the result of large borrowing amounts. The invested money will be repaid over a very long period of time. This method of finance is usually done in many different methods, including: bank loans, venture capital, and private loans.
Family and Friends
Raising finance can be achieved from a number of resources. The first place many turn are family and friends. Family members are usually willing to make a contribution, as they know the requester personally. Requesting money from family is difficult from some. They key is to make sure they fully understand what the contribution is for, and that there is always the potential for failure. This means of raising finance is usually for small expenses only. It has certain advantages, such as the possibility of being interest free, and the understanding of someone on a personal level should an unforeseen event happen. However, it's also important for the borrower to understand that finances can strain the relationship between the two parties.
Grants
Grants should nearly always be sought before loans. A grant, unlike a loan, does not require repayment. A grant will be either public or private, and can come from nearly any source. Grants are usually small and used in addition to loans and venture capital. They are virtually risk free, as they hold no interest, and require no shares in the company.
Loans
Loans are similar to grants, except that they need to be repaid and often collect interest. There are many different types of loans: private, bank, government, etc. Each will have unique requirements. Some will specify what aspects it can spent on, while others will be more general in their requirements. Some will have a fixed variable rate that is determined before the loan is issued. Others, however, will have a variable rate, meaning the interest rate will fluctuate regularly.Bank loans are usually secured for moderate to large sized financing, and often come in moderate through long term repayments. While a bank loan allows the company owners to remain sole shareholders, it does place the company in a position of bankruptcy should it default on interest or repayments.
Private loans may be an option if the company or owner has good networking connections. However, interest payments may be very high, and terms made by the investor could place the company in a vulnerable position for defaulting on payments.
Venture Capital
Venture capital is a very common means to raise finance for a startup company. It involves securing finance from an investing company in return for shares. The investors will receive a fixed amount of shares in the borrowing company, becoming shareholders. This means of borrowing is sometimes referred to as corporate venturing.This can be an excellent choice for raising finance, assuming the shareholders don't reach a position of high authority in the company. It's recommenced to avoid allowing the shareholders to become board members, or to give them a vote in decisions. This places the company in a position of vulnerability to the shareholders company.
Overdraft
In some cases, an agreement can be made by a borrower with their bank for over drafting. The bank agrees on a fixed amount that the borrower is allowed to overdraft their bank account, and determines a means of repayment. Interest may be fixed or variable.The requirements of this are very similar to that of bank loans. Interest payments should ideally be fixed, as variable rates will make payments uncertain each month.
One type of investment may not be enough. Often times, the best deal can be achieved by combining several borrowing methods, such as interest free options like venture capital and grants, in addition to loans. This will leave each aspect of investors relatively small, and place none in a large position of authority. It could also be made in a way to reduce repayments to the smallest amount or interest to the lowest rate.
Once a means of investment has been determined, the business plan for the company will need to be regularly updated as the company changes and expands. The finances will need to be managed, and the use of secured finance will need to be tracked. This is usually an additional expense on the company, and should be factored into the borrowed amount when determining the final amount needed.
There are important points to consider when offering assets and other positions in return for raising finance. A company should never be placed in a position where it could be potentially lost to the investor. Analyze the demands of the investor, and pay particular attention to these aspects:
- will the investor sit on the board, or have access to board meetings and decisions made?
- Will the investor have a vote within the company?
- Warranties offered?
- Are they in a position to bankrupt the company should they default on payments?
Failing to understand every aspect involved in the raised finance could result in some surprises after the money has been secured. This is especially true in venture capital, where the investor may eventually acquire enough shares for a corporate takeover.
No matter the means of increasing finance, the plans must be carefully made and a business plan created. Failing to secure enough finance could result in trouble receiving more, or additional interest payments. Terms must be laid out before the borrowing ensues, with all parties must understand the agreements made and their obligations. The borrowing company should negotiate terms until they fall under the capabilities of the company, in order to avoid payments it is unable to make.
Once both parties have solidly agreed upon a plan, the companies lawyers should do a final reading of the legal literature, and an account to should verify the final finance plans and investment to find any mistakes or discrepancies.