- Writing a Business Plan
- Financial Statements
- Business Forecasting
- Business Checklist
Three (3) CLASSES OF CAPITAL
Before you begin searching for potential investors, it is important to understand the 3 Classifications of Capital; namely, debt capital, equity capital, and venture capital. Below briefly discusses each classification.
Debt Capital is financing in the form of a business loan. Like a personal loan, a business loan requires the business to pay a rate of interest on the amount borrowed. For example, you may receive a loan of $25,000, to be paid in full within 5 years at an interest rate of 12%. The 12% interest is considered the return an investor receives for lending you their money. The advantage of this type of financing is that you, the business owner, don't relinquish any control of your business.
Equity Capital does not require you to pay an investor a rate of interest, but rather you provide them with an ownership of your business. As a result, the investor will share a portion of the profits in hopes of earning a satisfactory rate of return.
For example, you may offer an investor 10% of your business if he invests $30,000 into it. In this situation, your business will not pay the investment back to the investor, rather the investor will share a portion of your business's profits each year (or whatever arrangement is made). Be sure to discuss this matter with a qualified accountant before agreeing to equity financing. A lawyer may also be called upon to develop a contract between you and the equity investor.
Venture Capital usually involves investments from wealthy business people, individuals and/or a group of investors who form an investment company. These entities usually invest into high risk ventures.
If you have been "turned down" by traditional financing methods, you may decide to solicit a venture capitalist. These investors may "charge" businesses a high interest rate (debt capital) or request an ownership percentage of the company (equity capital) for their investment. In many cases, however, venture capitalists demand both - a high interest rate and an ownership percentage of the company (both debt and equity capital).
Each of the three classifications of capital have their own "benefits" as well as their own "costs". Therefore, it is wise to consult with an accountant before deciding on which one(s) to utilize. He or she can determine the classification that best suits your particular needs. Most accountants provide free, first-time consultation; so you have nothing to loose. And who knows, maybe the accountant will want to invest into your business.
Searching for an investor may not always be easy. Most entrepreneurs find it a constant struggle that causes a great deal of stress. With persistence and determination, however, your chances will improve.
It is important to look in the right places when conducting your financing search. Attending seminars, participating in local networks, and your local community are possible areas. Contact the head of your local Chamber of Commerce, he or she may know of a chamber member who is looking to invest into new opportunities. Also, check with an accountant or investment broker; they may have a client who is looking to diversify their investments.
Access to collateral, personal investment, and a professional business plan will play a vital role in obtaining the necessary financing for your business venture. For your convenience, these important items are briefly discussed below.
Banks, financial institutions and governments generally require collateral when providing loans or loan guarantees. In other words, access to collateral could mean the difference between receiving financing and not receiving financing. Collateral may include items such as a car, house, personal items, computer, stocks, bonds, insurance policies, land, and so. The more collateral you have, the greater your chances are for receiving financing.
Personal investment also plays an important role when seeking capital. The larger your personal investment, the greater chance you have for acquiring other investors; including a bank loan. Furthermore, your personal investment will be viewed by potential investors as an indication of your dedication and commitment towards the venture.
In other words, the more the owner has tied up in the business, the less chance he/she will abandon it should the enterprise ever experience financial problems. Remember - it is becoming increasingly more difficult to receive financing without personally investing cash and/or other assets into your new business or expansion.
YOUR BUSINESS PLAN:
The development of a well written business plan that discusses business goals, objectives, strategies, operations, marketing, finances, and so on... is as crucial as the owner's personal investment and access to collateral.
Moreover, a solid business plan shows an investor your ability to operate the business, generate sales, manage staff, develop marketing strategies, and carry the business through hard times. In addition, a business plan will show investors the owner's direction, knowledge and understanding of the industry he/she plans to enter. Investors do NOT invest in businesses, they invest into business owners.
In summary, having access to collateral, making a personal investment, and developing a well thought out business plan will certainly improve your probability of receiving the necessary financing. There is one other issue to consider:
"IF YOUR PRODUCT OR SERVICE WILL NOT SATISFY A CUSTOMER NEED, THEN CHANCES ARE IT WILL NOT SATISFY AN INVESTOR"
Good luck in your search for financing and stay motivated.