Sources of Personal Financing and Venture Capital

Source of financing

Many business owners try, try, and struggle to raise the money needed to launch a new endeavor. There are numerous sources to examine, thus it is crucial for an entrepreneur to thoroughly look for and consider all available financing possibilities. He or she should also submit applications for funding from a wide range of sources.

• Sources of Personal Financing:

  • Personal Saving: The finest source of funding for any new company initiative, according to experts and professionals, is the entrepreneur's own cash. It needs no transfer of ownership, is very simple to use, is quick to obtain, and has no payback or return requirements. Additionally, it shows potential investors that the entrepreneur is in charge of the risk involving his own money and will protect it in difficult times. Typically, an entrepreneur will use personal cash reserves to fund the start-up, or the beginning of the new endeavour. This is the most affordable and most available kind of funding. Usually, a shift in the entrepreneur's personal situation strengthens their decision to launch a firm. A redundancy or inheritance could be a nice illustration. The entrepreneur maintains the most control over the business endeavour through the investment of personal savings. Additionally, it sends a strong and secure message of commitment to other possible investors and banks.
  • Re-mortgaging: It is one of the most common methods of obtaining loan-related cash for a venture's launch. It functions in an easy manner. A larger mortgage is taken out on a private property by the entrepreneur, who then invests some or all of the proceeds in the business. This type of mortgage allows for relatively inexpensive financing, but there is a risk that if the business fails, the property will also be lost. Remortgaging has become more challenging due to the credit crunch and declining housing prices.
  • Friends and family: These individuals, such as friends, family, or other relatives, have faith in the entrepreneur and can be considered the second-easiest source of funding for the program. They typically do not require the documents that the other lender does. These money, though, must be recorded and handled like loans that must be paid back. These leaders should not be given any decision-making authority or ownership stakes unless they possess the necessary expertise. The primary drawback of these types of financing is that a valuable relationship may be at risk or in danger if the firm fails and the money is lost.
  • Credit cards: Entrepreneurs' own credit cards make for a convenient source of funding for the course, particularly when buying office supplies and machinery like photocopiers, laptops, and printers. In most cases, these things can be purchased with a few monthly installments and little to no upfront cost. Due to the high rate of interest charged, the biggest drawback of credit card balances is that they are not paid off in full each month.

• Commercial Banks: Banks are extremely cautious traditional lenders. According to Phil Holland, a very successful businessman, "Many potential business owners are dismayed to hear that banks do not give loans to start-up enterprises unless there are outside assets to guarantee against borrowing." Typically, many business owners lack sufficient assets or real estate to qualify for an insured loan from a lending institution. After all, an entrepreneur can typically borrow against money in a bank savings account if they have it. If an entrepreneur has strong credit, obtaining a personal loan from a bank is also rather simple. These loans typically have shorter terms and smaller amounts than company loans.

• Government programs: Numerous local, state, and federal governments provide initiatives to support and inspire small businesses. The Small Business Administration (SBA) in the United States supports or aids small businesses by guarantoring loans given by private organizations or banks to borrowers who might not otherwise be eligible for receiving a commercial loan.

• Venture investors: This is a significant source of funding for businesses that have the potential to grow quickly. After all, venture capitalists insist on keeping a stake in the new businesses they sponsor.

  • Formal institutional venture financing typically takes the form of limited partnerships, in which passive/uninvolved limited partners, such retirement funds, give the majority of the capital. These funds have a sizable quantity of capital to put into the project. Achieving venture funding, however, is a fairly drawn-out procedure. The details of the funds are provided in numerous sources, such as Galante's Venture Capital & Private Equity Directory.
  • Large corporations with money for investing in new business ventures are known as corporate venture funds. These frequently offer management and technical know-how in addition to the significant financial expenditures. After all, compared to other sources of funding for financing, these monies move rather slowly. Additionally, they frequently continuously trying to take over new business ventures.
  • Successful business owners who have resources or funds they are willing to risk or employ in the new endeavor are more likely to be angel investors. Typically, they insist on acting as active advisors to the company they are funding. Compared to corporate venture funds, angel funds move more quickly and are more likely to be invested in start-up activities. However, they might make fewer individual investments and interact with the financial industry less.

Venture Capital

Influx of money into a company that is more in the form of an investment than a loan, typically during the pre-IPO phase. These investments have a high rate of return and are secured by a sizeable ownership position in the business endeavor, and are constrained by an individual or small group called as venture capitalists. For many entrepreneurs, venture capitalists (VCs) represent the most glamorous and alluring type of finance. They are known for investing in high-growth businesses when they are in their infancy or early phases, and many of the most well-known success stories of entrepreneurs owe or incurred their expansion to investment from venture capitalists. By virtue of their absence or minimal presence, VCs can offer a sizable sum of money, prestige, and counsel. The very fact that you have venture capital financing indicates, at least in the view of venture capitalists, that your venture has a significant potential for profitable and quick expansion.

The young enterprises receive loans and equity investments from VCs. These loans typically come with high return rates of up to 20%. The yearly rate of return of 30% to 50% is what many venture investors continue to pursue. Unlike banks and other lenders, venture capitalists frequently own shares in the venture. This means that you do not need to make large payments in order to receive money in the form of principal installments and interest. Instead, in exchange for the VCs' support, you must give some of your or other owners' stake in the business. The problem is that in order to receive the funding for the establishment of your firm, you typically have to give up a sizable percentage of it. In fact, VC financiers—sometimes referred to as "vulture capitalists"—frequently seize majority control from the entrepreneurs who are giving them permission before forcing them out. But VCs come in many shapes and sizes, and they're actually quite good.

Venture capitalists frequently make investments in businesses they anticipate selling in the coming years, either to bigger companies or to the general public. Companies they take into account before investing typically have the following characteristics:

• Rapid, consistent, and sales growth
• Reduction of new technology or establishment of leadership in a developing market.
• A trustworthy management firm.
• The likelihood of being acquired by a bigger company or going public in a stock offering.

Reference:

Jim, R. (2009, 05 29). http://www.tutor2u.net/business. Retrieved from tutor2u.net: http://www.tutor2u.net/business/blog/what-are-the-main-personal-sources-of-finance-an-entrepreneur-can-obtain-fo

Retrieved from entrepreneur.com: https://www.entrepreneur.com/encyclopedia/venture-capital