Basics of Funding

Funding gives you the ability to achieve things that you could not otherwise with your current budget.

Funding gives you the ability to achieve things that you could not otherwise with your current budget. If your business requires you to bring in expensive equipment or talent, it usually requires money to buy these things. And if you don’t have the cash on hand, don’t worry, practically all successful businesses received funding at some point in their lifetime.

After an investor analyzes your company and sees that your business is healthy and has potential for future growth, then the investors or lenders will negotiate a deal. They will give you the money you need, and in return, the investors will benefit through interest payments, lease payments, or equity.

For larger investments, they typically ask for some control of your company to alleviate the risk on their side. This will give them the ability to influence business decisions and operations of the business.

Every business starts at the bottom of the ladder of funding. The higher up the ladder you climb, the more funding you receive—but also the more you will give up in exchange.

Personal Cash is at the very bottom of the ladder and is by far the best form of financing. Investing cash you already own is quick, easy and you don’t have to give anything in return. You also get to retain 100% ownership of any future growth and profits that come with it.

Personal Credit is another low-cost form of funding because it’s easy and quick. Personal credit will only work if your needs don’t exceed a few thousand dollars and if you have good credit.

Personal Loans typically come from friends & family and should be used if you need more money than the previous options offer.

Unsecured Loans come from financial institutions such as banks and credit unions. Unsecured loans are issued based on a person’s credit history which shows your ability to pay the loan back with interest. The loan can either be given as a lump sum or a line of credit.

Secured Loans require collateral while unsecured loans are issued based solely on a person’s credit history. If you don’t make the payments towards this loan, the lender has the right to seize and sell the asset listed as collateral. Secured loans are much larger than unsecured loans.

Bonds are debt that is sold to lenders. Instead of asking a bank for a loan, you may ask individuals or other companies to loan you money in return for a bond in which you pay back that loan at an agreed-upon rate. The legal implications of defaulting on a bond loan are complicated and hence why bond issues are usually conducted through an investment bank.

Receivables Financing is a special form of secured lending unique to businesses. Receivable financing offers millions of dollars in credit but with collateral being controlled over the business’s receivables (money owed to the business). Since banks control the receivables, they can make sure the loan is paid before anything else—even before payroll and vendor commitments.

Angel Capital is the first step on the ladder away from loans and on to capital. An angel investor is basically a private accredited individual investor. These investments typically range between $10,000-$1,000,000 and are given in exchange for equity in the business. Angel investments typically happen very early on in the lifecycle of the company.

Venture Capital investors are extremely wealthy investors or pools of investors who offer very large sums of capital (tens or hundreds of millions of dollars) in one single investment. Venture capital funding typically happens in “rounds” that start small and then grow as more capital is needed for growth and expansion.

Public Stock Offering or initial public offering (IPO) is at the very top of the ladder. This is when your company is so big that you decide to sell partial ownership to investors on the public market. This is usually done via investment banks that provide a business with very large amounts of capital in exchange for the shares of your company to sell on the public stock market.

Funding can be useful, but be cautious about how much control you give up in return for capital. Before you seek funding, ask yourself if you really need it. Sometimes you can achieve your goals by doing the hard work and you don’t necessarily need the capital. But there are times when seeking funding is a wise decision.

Note that the financiers proposed to cure by lending money and not by bettering methods.”

Henry Ford