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How to finance a business is one of the main
concerns that every new business person has to
resolve. There are two main ways of financing a
business, equity financing and debt
financing.
The majority of start-up or small businesses use
limited equity financing. As with debt
financing, additional equity often comes from
non-professional investors such as friends,
relatives or colleagues.
However, the most common source of professional
equity funding comes from venture capitalists.
These are institutional risk takers and may be
groups of wealthy individuals or major financial
institutions. Most specialise in one or a few
closely related industries.
Venture capitalists are often seen as
deep-pocketed financial benefactors looking for
start-ups in which to invest their money, but
they most often prefer three-to-five-year old
companies with the potential to become major
regional or national concerns which will return
higher-than-average profits. Venture capitalists
may scrutinise thousands of potential
investments each year but only invest in a
few.
Different venture capitalists have different
approaches to management of the business in
which they invest. They generally prefer to
influence a business passively, but will react
when a business does not perform as expected and
may insist on changes in management or strategy.
Relinquishing some of the decision-making and
some of the potential for profits are the main
disadvantages of equity financing.
Banks are one of the most common sources of debt
financing. There are many other sources for debt
financing including: savings, loans and
commercial finance companies. It is also
possible to ask for funding from family members,
friends or colleagues, especially when the
capital requirement is small.
Traditionally, banks have been the major source
of small business funding. Their principal role
has been as a short-term lender offering demand
loans, seasonal lines of credit, and
single-purpose loans for machinery and
equipment. Banks generally have been reluctant
to offer long-term loans to small firms.
In addition to equity considerations, lenders
commonly require the borrower's personal
guarantees in case of default. This ensures that
the borrower has a sufficient personal interest
at stake to give paramount attention to the
business. For most borrowers this is a necessary
evil.
You may freely reprint this article provided the
author's biography remains intact:
About the Author
John Mussi is the founder of Direct Online
Loans who help UK homeowners find the best
available loans via the www.directonlineloans.co.uk
website.
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