FINANCING THE VENTURE

Financing the Venture  Capital is any form of wealth employed to produce more wealth.  Three forms of capital are commonly identified: 1. Fixed capital, 2. Working capital 3. Growth capital

Fixed capital  is used to purchase a company’s permanent or fixed assets;  Main types of company’s fixed assets:  land  building  Equipment  Money invested in fixed asset tends to be frozen because it cannot be used for any other purpose

Working capital  Represents the business’s temporary funds and is used to support the business’s normal short-term operations;  Current assets minus current liabilities;  Used to buy inventory, pay bills, finance credit sales, pay wages and salaries and take care of unexpected emergencies.

Growth capital requirements  surface when an existing business is expanding or changing its primary direction  finances expansion or purchasing new buildings, hiring additional workforce, increasing inventory.

Sources of Capital 1. Owner’s Equity 2. Friends and Family 3. Angel investors 4. Commercial loans 5. Trade or supplier credit 6. Leasing companies 7. Venture capital companies 8. Commercial finance companies

Owner’s Equity  At the first stage of financing, entrepreneurs usually invest their own funds. Coming from the owner’s personal savings.

Friends and Family  Raising financial capital from friends and family is a common approach for entrepreneurs launching a new venture. Friends and family are more likely to invest in a venture because of the personal relationship established with them over time.

Angel investors  includes any individual who invests his or her own money in a new venture, typically in return for equity in the venture. Angels range from professionals, such as doctors and lawyers, to successful entrepreneurs who are now seeking to finance one or more new ventures. Angels are private investors who not only invest their money in small companies, but they also offer valuable advice and counsel to them.

Commercial loans  4.1. Short-term commercial loans (30 to 90 days) are the most common loans made to a small business. They usually cover business operation expenses such as rent, insurance, advertising, inventory or salaries. Short-term loans are often unsecured and repayment is usually a lump sum, including interest when the loan matures.

Commercial loans  4.2. Long-term commercial loan is for five years or more to purchase an existing business, buy real estate, or construct or improve a building or facility. The long-term loan is always secured by the assets for which the loan was made, usually requires constant monthly payments and often has a variable interest rate.

Trade or supplier credit  Payment terms offered by suppliers are a potential source of credit. Study the discounts for early payment and the penalty for late payment to determine the true cost of the credit. While some suppliers will extend credit only to well-established, proven firms, many will extend limited credit to new businesses to encourage another outlet for their merchandise.

Leasing companies  Leasing business equipment is another way to reduce capital needs. Everything from office furniture to food processing equipment can be obtained from leasing companies or commercial finance companies. Leasing is generally more expensive than bank financing and is limited to items that have a long serviceable life, widespread use, and are easily repossessed in the event of default.

Venture capital companies  Are for-profit, professional investors looking for fast-growing companies in “hot” industries. When screening prospects, venture capital firms look for competent management, a competitive edge, a growth industry, and important intangibles that will make a business successful.

Commercial finance companies  Offer many of the same types of loans that banks do, but they are more risk oriented in their lending practices. They emphasize accounts receivable financing and inventory loans.