Lesson 8: Funding Your Plan
While navigating your new or existing business on its intended road to success, there are many varied funding paths you can take. This lesson will help you conduct formal evaluations of capital in the right places, and early on, before your funding needs jeopardize your business.
Identifying Your Capital Needs
Financing your business requires careful planning, research and logistics. Identifying your capital needs and seeking the right source of financing for filling those needs can get confusing and complicated at times.
You may have started in business as a specialist in a particular area of business -- marketing, sales, R & D, or operations. Now as an owner, you need at least a general understanding of all aspects of business, especially appropriating and making efficient uses of funds.
The basis for your business may be a very sound concept, but funding new growth or maintaining existing growth can pose many challenges. Different types of capital requirements need different funding vehicles, all with different rules and steps similar in many ways to a game of monopoly or chess. Growing a business most often requires more capital than is readily available from existing cash flow or from the resources of the founder(s). Conversely, obtaining too much capital or raising it too soon can also cause problems for the business.
The first step in this search is to learn and understand the pros and cons of the various types of capital needed for your enterprise. Capital comes into your business in two ways: Equity or Debt.
Equity financing is the investment of the owner(s) of the company. It is money in exchange for shareholder value. It stays in the company for the life of the business (unless replaced by other equity) and is repaid only when and if there is a surplus in the liquidation of the business, after all creditors are paid. Usually getting new equity is difficult, especially during the early stages of the business.
Debt financing, on the other hand, can come into the business in a variety of ways. It comes back for a defined period of time and is paid back, usually with interest.
The financing of your business can further be classified by its purpose: Start-up financing is used to get the company to an operational level using the costs of getting the first products or services to market. This is best done with equity and long term loans or leases. Working capital is required to drive the day to day operations of the business. Because operational needs vary during the year based on seasonality, inventory buildup, market movement, etc., seeking working capital serves to cover the valleys while preparing for the peaks. Growth capital is not tied to the yearly aspects of fueling the business. Rather, it is needed when the business is expanding or being changed in some significant and costly way that is expected to result in higher and increased cash flow. It is generally longer term than working capital and is paid back over a period of years from the profits of the business.
Knowing specifically what type of capital your business will be needing will put you in a stronger position when evaluating how and where to seek your financing.
