5 Unique Sources of Capital to Start or Grow your Business

  • Sumo

According to the Wikipedia, it defines “Business” as the activity of making one’s living or making money by producing or buying and selling products and or services. Simply put, it is any activity or enterprise entered into for profit. Approximately 8 out of 10 businesses fail in the first 18 months of operation. One of the most important reasons for failure is that the business began without sufficient capital to continue operating until it reached profitability.

To run a business effectively a working capital is needed. Capital is the money or wealth needed to produce goods and services. In the most basic terms, it is money. All businesses must have capital in order to purchase assets and maintain their operations. Business capital comes in two main forms: debt and equity. Debt refers to loans and other types of credit that must be repaid in the future, usually with interest. Equity, on the other hand, generally does not involve a direct obligation to repay the funds. Instead, equity investors receive an ownership position in the company which usually takes the form of stock, and thus the term “stock equity.”

There are myriad of business financing and capital sourcing for either a new business conceptualized to be started or for an existing on in terms of expansion and growth, but we shall be looking at five main sources of capital financing that will help start or grow your business.

  1. Personal investment and Equity

When starting a business, your first investor should be yourself—either with your own cash or with collateral on your assets. This proves to investors and bankers that you have a long-term commitment to your project and that you are ready to take risks. There are 3 types of equity for funding business operations: Public Equity, External Private Equity and Internal Equity. Public equity or securities include IPOs and crowd funding efforts. The stakes are high; the reporting and regulatory requirements are higher. External private equity is capital raised from angels, VCs and institutional private equity. These forms of capital ideally come with business advisory support because the cost of this capital is high and the investment in keeping these investors informed or integrated is time intensive. Internal equity is owner’s equity or a retained earnings that sometimes ends up attached to debt instruments in the form of guarantees. Equity is a high cost, high risk and high maintenance form of raising capital and it is not for the beginner.

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  1. Government Grants & Subsidies

Most people think of non-profits when they think of grants, but the truth is there are grants available in sectors that are critical to our economy or national interests. Think of the growth in the healthcare sector as regulations have taken hold and innovation is being incentivized. There is a wealth of information on Federal grants available to small businesses on the Small Business Administration . Government agencies provide financing such as grants and subsidies that may be available to your business. The Canada Business Network website provides a comprehensive listing of various government programs at the federal and provincial level.

Approximately 8 out of 10 businesses fail in the first 18 months of operation. One of the most important reasons for failure is that the business began without sufficient capital to continue operating until it reached profitability. To run a business effectively a working capital is needed. Capital is the money or wealth needed to produce goods and services. In the most basic terms, it is money. All businesses must have capital in order to purchase assets and maintain their operations.

Criteria

Getting grants can be tough. There may be strong competition and the criteria for awards are often stringent. Generally, most grants require you to match the funds you are being given and this amount varies greatly, depending on the granter. For example, a research grant may require you to find only 40% of the total cost.

Generally, you will need to provide:

  • A detailed project description
  • An explanation of the benefits of your project
  • A detailed work plan with full costs
  • Details of relevant experience and background on key managers
  • Completed application forms when appropriate

Most reviewers will assess your proposal based on the following criteria:

  • Significance
  • Approach
  • Innovation
  • Assessment of expertise
  • Need for the grant

Some of the problem areas where candidates fail to get grants include:

The research/work is not relevant

Ineligible geographic location

Applicants fail to communicate the relevance of their ideas

The proposal does not provide a strong rationale

The research plan is unfocused

There is an unrealistic amount of work

Funds are not matched

  1. LOANS

Loan brokers and Bank loans are the most commonly used source of funding for small and medium-sized businesses. They offer categories of loans such as personal, property and business loans which are offered in different advantages, whether it’s personalized service or customized repayment. It’s a good idea to shop around and find the Loans that meets your specific needs.

In general, you should know bankers are looking for companies with a sound track record and that have excellent credit, while most loan brokers online may not have high prerequisite but may require basic criteria. A good idea is not enough; it has to be backed up with a solid business plan. Start-up loans will also typically require a personal guarantee from the entrepreneurs.

  1. Angels

Angels are generally wealthy individuals or retired company executives who invest directly in small firms owned by others. They are often leaders in their own field who not only contribute their experience and network of contacts but also their technical and/or management knowledge. Angels tend to finance the early stages of the business with investments in the order of $25,000 to $100,000. Institutional venture capitalists prefer larger investments, in the order of $1,000,000.

In exchange for risking their money, they reserve the right to supervise the company’s management practices. In concrete terms, this often involves a seat on the board of directors and an assurance of transparency.

Angels tend to keep a low profile. To meet them, you have to contact specialized associations or search websites on angels.

5. Sale of Fixed Assets Retained Profits

The sale of a firm’s assets is most profitable for a mature firm. A firm, for example, can sell older assets that have been replaced by others or that are no longer needed for operations. If these assets have been fully depreciated and have little or no book value, you will have a taxable gain from the sale. Nevertheless, such sales can add to your bottom line. In other instances — and increasingly so in the largest coastal cities — the rapid appreciation of real estate assets has meant that a business — a restaurant, for example — may hold real estate assets that far exceed the value of the business as an ongoing operation.

In these instances, the business can multiply its capital simply by selling the business and the underlying real estate in its present high-value real estate location and relocating in an area that has not yet benefited from the real estate boom.

Retained Profits

A better source of capital for a company than debt or equity is a positive operating income from quarter to quarter. Why? Because the company is generating positive operating income from its own successful business operations. Operating income is also known as earnings before interest and taxes or EBIT. Operating income or EBIT is commonly used to determine the overall success of the business.

 

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