Business Fund Quest 9781927060711, 9781927060728

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Business Fund Quest Smart Business Book Series

Title Business Fund Quest (Smart Business Book Series) Author Co Author Layout Designer Publisher ISBN Website

Master Steve Mojdeh Moghadam Keyvan Silk Road Publishing (Toronto, Canada) Printed Book: EBook:

978-1-927060-71-1 978-1-927060-72-8

www.MasterSteve.com

Note: The author of this book gives the right to use the present content, provided that the source is cited, to professors, educators, teachers, lecturers, and academic and non-academic educational centers, for an indefinite period. The copyright of this book is internationally registered for the author.

Attributions:

Images Credits: Pch.Vector / Freepik

Contents

Chapter 1: Crowdfunding What is Crowdfunding?....................................................................... 13 How it Works?........................................................................................... 14 Advantages and Disadvantages of Crowdfunding.................. 16 Advantages of Crowdfunding............................................................16 Disadvantages of Crowdfunding.....................................................19

Types of Crowdfunding...................................................................... 21 Donation-based Crowdfunding................................................. 21 Rewards-based Crowdfunding................................................... 22 Equity-based Crowdfunding....................................................... 23 Debt-based Crowdfunding.......................................................... 26

Why Should You Try Crowdfunding?.......................................... 27 Practical Tips that Guarantee Successful Crowdfunding:.. 29 Crowdfunding Statistics...................................................................... 30 Summary.................................................................................................... 33

Chapter 2: Bootstrapping What is Bootstrapping?........................................................................ 35 Techniques for Obtaining Bootstrap Finance.......................... 37 Advantages and Disadvantages of Bootstrapping................... 39 Advantages....................................................................................................39 Disadvantages.............................................................................................40

Types of Bootstrapping....................................................................... 41 Trade Credit........................................................................................ 41 Conditions for Obtaining Trade Credit.......................................42

1. Size of the Firm....................................................................................42 2. Industrial Categories..........................................................................42 3. Nature of Product................................................................................43 4. The Seller’s Financial Position.....................................................43 5. The Financial Position of the Buyer.........................................43 6. Risk of Business....................................................................................44 7. Nature of Business..............................................................................44 Types of Trade Credits..........................................................................45 Factoring............................................................................................... 46 Types of Factoring ..................................................................................46 Advantages of Recourse Factoring:................................................47 Real Estate............................................................................................ 48 Equipment Suppliers...................................................................... 50 1. Conditional Sales Agreement.......................................................50 2. Chattel Mortgage Contract............................................................52 Leasing................................................................................................... 53 1. Finance Lease........................................................................................53 2. Operating Lease...................................................................................54 Advantages of Lease Financing.......................................................55 Customers............................................................................................ 56 Second Mortgage.............................................................................. 59 Advantages of the Second Mortgage.............................................60 Disadvantages of the Second Mortgage.......................................61 Summary.................................................................................................... 62

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Business Fund Quest

Chapter 3: External Sources What is External Sources?.................................................................. 64 Advantages of Using External Sources of Finance ................ 65 Disadvantages of Using External Sources of Finance .......... 66 Types of External Sources.................................................................. 68

1. Angel Investors.............................................................................. 68 What are Angel Investors? ..................................................................68 How does Angel Funding Work? .....................................................70 Finding Angel Investors .......................................................................71 Advantages and Disadvantages of Funding with an Angel Investor for Your Startup......................................................................72 Advantages....................................................................................................72 Disadvantages.............................................................................................74

2. Family Offices............................................................................... 76 Obtaining a Willing Family Investor ............................................77 3. Venture Capital ............................................................................ 78 How to Generate Venture Capital Funds ...................................80 Structure of a Venture Capital Firm .............................................81 Assessment of Venture Capital Startup before Funding....82 Difficulties for Venture Capitals.......................................................83 Monetizing Investments ......................................................................83 Moving past Financing..........................................................................84 Balancing Profit with Loss...................................................................85 4. Crucial Shareholders ................................................................ 86 Things to Consider when Seeking a Crucial Shareholder .. 88 5. Bank Loans..................................................................................... 93 6. Bank Overdraft............................................................................. 99 

5

Types of Overdraft Bank Accounts................................................100 Advantages of Overdraft Bank Account .....................................102

7. NBFIs and Microfinance.......................................................... 104 Types of NBFIs...........................................................................................105 Advantages of NBFIs over Traditional Banks...........................106 Disadvantages of NBFIs........................................................................107 Advantages of Microfinance..............................................................109 Disdvantages of Microfinance..........................................................110 8. Business Incubators and Accelerator................................. 111 Significant Dissimilarities between Business Incubators and Business Accelerators ............................................................................112 Performance of Duties Provided by Business Incubators .... 113

Types of Business Accelerators and Incubators......................114 How to Decide which Business Incubator/Accelerator to Pick for Your Startup...............................................................................116 Advantages of Business Incubators................................................117 Disadvantages of Business Incubators..........................................118

9. Creating Partnership.................................................................. 119 Advantages of Forming a Partnership .........................................121 Disadvantages of Creating Partnerships......................................122 Things You must be Sure about before Creating a Partnership: .................................................................................................123

10. Economic Development Organizations........................ 124 11. Bartering....................................................................................... 126 The Advantages of Bartering ............................................................130 The Disadvantages of using Barter.................................................131 Summary.................................................................................................... 132 6

Business Fund Quest

Chapter 4: Equity Financing What is Equity Financing?.................................................................. 135 Types of Equity Financing................................................................. 136

1. Life Insurance Policies ............................................................. 136 Types of Life Insurance Policies......................................................137 2. Friends and Family..................................................................... 138 Essential Tips Needed when Approaching Family and Friends............................................................................................................139 Advantages of Financing from Friends and Family.............140 Disadvantages of Financing from Friends and Family.......140

3. Equity Offerings........................................................................... 141 Types of Offerings...................................................................................142 4. Sweat Equity................................................................................... 144 Important Factors to be Considered in Sweat Equity.........145 How to Determine the Value of a Sweat Equity......................145 Advantages of Sweat Equity................................................................146 Disadvatages of Sweat Equity............................................................146 5. Warrants........................................................................................... 147 Types of Warrants....................................................................................148 Advantages of Warrants........................................................................149 Disadvantages of Warrants..................................................................150 Summary.................................................................................................... 151

Chapter 5: Debt Financing What is Debt Financing?..................................................................... 153 Types of Debt Financing..................................................................... 154

1. Commercial Finance Companies........................................ 154 

7

Commercial Finance Options...........................................................155 Advantages of a Commercial Finance Company..................156 Disadvantages of Commercial Finance Companies............156

2. Bonds................................................................................................. 157 Types of Bonds..........................................................................................158 Advantages of Bonds..............................................................................159 Disadvantages of Bonds........................................................................159 3. Mezzanine Financing................................................................ 160 Characteristics of Mezzanine Loans..............................................161 Mezzanine Financing can be Requested:....................................162 Advantages of Mezzanine Financing.............................................163 Disadvantages of Mezzanine Financing......................................163 4. Alternate Peer to Peer (P2P) Lenders................................. 164 Things that Should be Considered when Opting for a P2P Lending Platform:....................................................................................166 What is Peer-to-Peer Lending?.........................................................167 Advantages of Peer-to-Peer Lending............................................168 Disadvantages of Peer-to-Peer Lending......................................169 5. Bridge Funding............................................................................. 170 Types of Bridge Funding.....................................................................171 Advantages of Bridge Funding.........................................................172 Disadvantages of Bridge Funding...................................................173 6. Line of Credit (LOC).................................................................. 174 Types of Business LOCs:......................................................................175 Advantages of Line of Credit.............................................................176 Disadvantages of Lines of Credit.....................................................177 Summary.................................................................................................... 178 8

Business Fund Quest

Chapter 6: Startup Competitions What is Startup Competitions?........................................................ 180 Things to Consider while Planning for a Startup Competition ............................................................................................. 181 Advantages of Participating in Startup Competitions.............................................................................183 Disadvantages of Participating in Startup Competitions.............................................................................184

Startup Competitions Around the World................................... 185

1. AngelPad.......................................................................................... 185 2. TechCrunch Disrupt................................................................... 185 3. Web Summit (Dublin)............................................................... 186 4. 7VPS, SevenVentures Pitch Day (London, Berlin)....... 186 5. LeWeb (Paris)................................................................................. 186 6. Global Meetup 2021. 187 Summary.................................................................................................... 188

Chapter 7: Other Sources Retain Your Day Profession............................................................... 190 Enquire a Lawyer.................................................................................... 192 Advice Accessible by Startup Lawyers.................................... 193

Product Presale........................................................................................ 194 How to Set up a Successful Presale?......................................... 195 Advantages and Disadvantages of a Presale......................... 196

Funding through a Self-Growth Fueled Model....................... 197 White Label Agreement...................................................................... 198



9

Chapter 8: Financial

Options For Veteran-

Owned Business Loans ........................................................................................................... 202 Entrepreneurship Training for Veterans..................................... 204 Summary.................................................................................................... 207

Chapter 9: Government Programs What is Government Programs?..................................................... 209 Advantages of Acquiring Funds through Government Schemes.........................................................................................................212 Disadvantages of Acquiring Funds through Government Schemes.........................................................................................................213

Examples of Government Programs around the World..... 214

1. SBA Loan Programs (U.S.):...................................................... 214 2. Community Development Financial Institutions (U.S.): .. 214 3. Market Readiness Investment Program (Canada):...... 215 4. SR&ED Tax Credits (Canada):................................................ 216 5. Canada Small Business Financing Loan (Canada):...... 216 6. Futurpreneur Loans (Canada): ............................................. 217 7. Entrepreneur Program (Australia):..................................... 217 8. Startup India (India): ................................................................. 218 9. PMMY (India):............................................................................... 218 10. Start-up Chile (Chile): ............................................................ 219 11. Government Programs in Africa:...................................... 220 12. Startup Europe:.......................................................................... 221 Summary.................................................................................................... 222 10

Business Fund Quest

Chapter 10: Grants And Subsidies Grants........................................................................................................... 225

1. Government Grants for Small Business........................... 227 2. Corporate Business Grants..................................................... 227 3. Business Grants for Women................................................... 228 4. Business Grants for Minorities............................................. 228 Subsidies..................................................................................................... 229 Tax-Increment Financing (TIF)....................................................... 230 Criticisms.............................................................................................. 231 Summary.................................................................................................... 232



11

Chapter One

Crowdfunding

What is Crowdfunding? It is a rapidly acknowledged medium of raising capital adopted by an individual or a company to gather money through donations from many people. Crowdfunding is also the practice of funding a certain goal or venture or project/mission by many individuals who intentionally choose to contribute a particular amounts of money to meet a certain target and help a business meets its goal(s). Crowdfunding is mostly done through the Internet nowadays but people still do it offline. Simply put, crowdfunding is alternative finance. The contributors may include family, friends, relatives, group members, strangers, individual investors, and small scale businesses. Somewhat similar to crowdsourcing, it involves a large number of people contributing small amounts of money to fund a specific project. Crowdfunding provides an avenue that aggregates individual investors, entrepreneurs under the same banner supplied by the crowdfunding platform.

Crowdfunding

13

It is an unorthodox medium of raising funds. It offers the easiest ways for entrepreneurs to increase large capitals by making the platform accessible to everyone.

How it Works? With crowdfunding, anyone with a great business plan can implement it without personal capital. This is because such an idea is presented to prospective investors with the promise of an attractive return on investment. The active components of the platform are:

I. II.

The person or company that developed the idea,

The potential investors who are ready to provide funding to implement the concept,

III. The connective platform that brings the idealist and the investors together.

An innovator can write a proposal and develop a business plan to describe his/her idea on a viable crowdfunding site. This plan shall explain in full detail; the business plan, the business prospects, how much capital is needed and why, and more practically, how much they stand to profit off the company, how much investors stand to gain, etc. The detail includes the number of people expected to form the

14

Business Fund Quest

crowd and the respective amounts paid by each unit, e.g., you can say $10 per unit. There ought to be a ready market of buyers who will believe in the project and commit to buying the product when it is finally produced. There are usually limitations placed on the caliber of people who can invest and how much they can contribute. This is set to offset the risk factors that may push away investors. If they feel like they are putting in a lot of money, they may not invest. Many businesses potentially fail, and this fear is natural in investors’ hearts – small and large. They need protection from the risks involved in investing a large amount of their savings. Most crowdfunding platforms generate profit by making 5-13 % deductions of the total

capital raised, including the registration and processing fee.

Crowdfunding

15

Advantages and Disadvantages of Crowdfunding Crowdfunding is a unique way for entrepreneurs to quickly establish their business, get massive capital investment and get their products to the end-users even before they produce. With that they secure prior market interest from the onset. Advantages of Crowdfunding Helps entrepreneurs in raising capital for a business project. Unlike other means of getting funds, crowdfunding offers an easier way of obtaining money. Also, crowdfunding makes it less stressful to impress prospective investors or venture capitalists. Crowdfunding takes more time and effort. With a well-elucidated business plan and laudable story, crowdfunding platforms can help any entrepreneur implement their business plan efficiently. It helps businesses to get a head-start and enhances stability. The crowdfunding platform is an avenue that allows the owner to have all the registered investors under one umbrella. The website holds the data of the collective and, thus, can be easily monitored. Marketing does the job of impressing investors, and the platform increases in reputation. Investors can give input to the development of the idea behind the venture. That makes it yields better results for both entrepreneur and investors.

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Business Fund Quest

It functions as a medium for established markets: On a crowdfunding platform, the entrepreneur meets the investors with a relative ease. This may not be possible or much difficult in other modes of funding. Buyers are usually skeptical about an unproven production point and thus might be inaccessible. With online crowdfunding, it is easier to connect with the right crowdfunding platforms that will be willing to invest in a vision from the onset. The benefit attached to this kind of support network is that they share their opinions and establish connections with the platform to maximize profit while promoting it. This can help a new business to reach its ideal market faster. It is easier to obtain customer opinion or feedback: You can relate directly or indirectly with your target customer/ investor base. You can pose questions to them and hear their useful comments, advice, and legitimate complaints. This can help you better maximize the resources you have and offer insight into what the customers desire. Crowdfunding

17

It forms the easiest way to establish strong networks. People will be attracted to a feasible business plan and idea. This will publicize the platform and land it on important media platforms; thus, the initiative’s goal and mission are communicated to the populace. You obtain the much-needed exposure that will move the business forward.

Crowdfunding prepares you for the long term. With crowdfunding, you can beta-test the market for your product’s acceptability before it is fully developed and made available. This, coupled with continuity, can help establish a successful, lasting business. It is of mutual benefit for both entrepreneurs and the investors. For the investors, it drastically reduces transactional expenses and enables them to find a company to invest in.

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Business Fund Quest

Disadvantages of Crowdfunding

Securing investors on crowdfunding platform is not automatic. Though it is a cool platform with many prospective investors, it can still be challenging to get investors’ right to fund your project. However, things might start well if the business plan is impressive, which will attract more investors to consider your strategy and contribute to it.

There is also the problem of scammers and Ponzi schemes that are rife in the world of crowdfunding. This may lead to apathy on investors’ part towards your cause, especially if they have had prior experience and lost a considerable amount of money to scammers. These scams are executed as everyday crowdfunding projects, but they never kick-off as the investor is swindled. It causes trust issues that may prevent your crowdfunding platform from attracting the investors that it needs.

Crowdfunding

19

For a successful venture, the product must be something unique and readily acceptable by the market. Thus, there will be zero points to the excess funds to be raised through crowdfunding. The venture must offer products of value that the market can anticipate, and this is what translates as a well planned and successful innovative idea. This means, your vision must be in tune with the investors and your goals must meet the needs of investors and end-users of your product.

It requires in-depth planning for it to reach its target crowd. The plan must be well mapped out, and all preparations must be put in place. Doing that will make it outstanding and attractive to investors and entrepreneurs as well. Expenses such as ad marketing might be incurred. This might necessitate the employment of PR personnel and experts in marketing who will endure adequate promotion to bring maximum exposure to your crowdfunding project. The budget’s efficient allocation must be done correctly and adhered to, or else, it can turn out to be an overwhelmingly costly venture and a loss in the end.

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Business Fund Quest

Types of Crowdfunding There are four categories of crowdfunding. However, this depends on what the investors stand to gain in return. The most exciting part is that an entrepreneur can choose crowdfunding methods relative to the type of product and the business’s objective.

Donation-based Crowdfunding Yes, it is as it sounds! Investments made in this light are non-profit, and the investor/donor doesn’t expect anything in return. Out of all crowdfunding types, this is the easiest to implement. This donation arises from an individual or business’s desire to contribute to a project they believe in and such a business plan or idea that they want to be successful. The entrepreneur is not obligated to give any financial return to the contributing people. It is deemed legal in India and is in practice in other countries of the world. The donors do not own any stock in the business. They are primarily adopted to fund projects of charitable intent to solve social and environmental problems. The portrayed benefit of the project in the general society is primarily what attracts the donors to support the cause.

Crowdfunding

21

Rewards-based Crowdfunding This is where investors are allowed to invest for a specified return on investment. The entrepreneur places its ads on a crowdfunding site. Investors then contribute to this plan. The contributors can be friends, family, relatives, individuals, and other customers. Contributors are also called donors. It applies to viable business ideas that require a large amount of capital. It is a system that is legal in many countries of the world. The donors get a particular reward as specified in the agreement signed. This system is a simple business plan that promises quick returns at the appropriate specified time. No prior business experience is necessary, and there is no need for input collateral. It doesn’t require the use of legal support in signing an agreement. All that is needed is that an entrepreneur needs to raise capital funding through this method of crowdfunding. The advantage is also that the startup business does not have to give up ownership of the company. The incentives can be in the following ways: Provision of the final product after the production z process.

Gifts that bear the emblem of the company. z Reward does not have to be huge, but something of z value to appreciate consumers’ investment.

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Business Fund Quest

Equity-based Crowdfunding Here the contributors are identified as investors. In this type of crowdfunding, the investors don’t just contribute to the cause of the business. Still, they aim to improve the company’s growth, and they earn specific percentage ownership of the business. They become part owners of that business. Compared to the types mentioned earlier, the investors contribute a large amount of money and share in the industry’s profit. The entrepreneurs are primarily in the driving seat of the business. And they regulate the amount an investor can put in and the percentage equity they are liable to get for their investment. The investors merely enjoy the shares of the profit made in the business. In this business, the risk is high. This is because all investors will lose their investment should the business fail. Some of the dangers involved in it are: Long years for return and undefined dividendsz

Such a venture needs ample time to develop and make profits. Investors have to sell their shares to earn anything; otherwise, they will have to wait for years to stand a chance at getting a gradual return on their investment. The investor’s percentage requires time to increase in value, impacting the selling of shares if an investor wants to. True, investors face the prospect of earning returns on their investments. Still, it is Crowdfunding

23

subject to a lengthy period when the invested capital is locked up in the business’ coffers without yielding anything. It might not pose a problem for investors that are much wealthier as they can sustain themselves within the waiting period. They have other sources of liquid capital backup.

z The investors’ interests are not necessarily protected, especially when the company/facilitator decides to

raise more capital for the project. It means more shareholders are coming in, and the percentage equity of the initial investors decreases. The shares can get diluted, and protection against this event must be added to its policy. This method of crowdfunding allows investors to sell part of their shares in public markets. It can be done in a relatively easy way that reduces the risks for smaller investors. This gives smaller investors a chance to contribute and earn dividends. Primarily, only angel investors and venture capitalists had access to crowdfunding; however, other smaller investors can now invest too within defined specifications. The larger the shareholders, the more the liquidity.

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Business Fund Quest

In securing the interest of investors, businesses can raise funds from investors in two ways:

1. Tier 1:

This sets a

12-month

request for a

business that wants to raise a large capital. To make this legal, the company has to register and provide details of the SEC’s offering for review and other concerned bodies within the company’s proximity. This type of offering has no prior audits and systematic report requirements. Also, the document de� scribing the offering is expected to pro�vide all the necessary information.

2. Tier 2:

With this, entrepreneurs can raise cap� ital to $50 million within

12-months.

The company is to provide welldetailed

offering

posed to Tier

1,

circulars. As

op�-

there are reporting

requirements- semiannual and annual reports

detailing

all

the

specified

period’s activities. They are also made to go through internal and external audits from time to time. This is done by external bodies and independent accountants. Investors’ caliber is re� stricted, and non-credited investors can only invest about income or net worth.

Crowdfunding

10%

of their net

25

Debt-based Crowdfunding It is widely regarded as a peer-peer loan-based lending system. It forms a viable source of raising funds for your budding startup. It was made available for entrepreneurs who have difficulties securing bank loans or raising capital through other financial options. Crowdfunding is a better alternative source of funding. The investors expected an individual return on their loan as repayment at certain intervals and agreed on interest rates. However, the time and interest rate are subject to the entrepreneur trying to raise funds. This crowdfunding model is particularly relevant to investors who do not want to lose equity in their businesses but are sure of the business prospects to repay the loan and the interest rates. This is the primary perk of this form of crowdfunding, as opposed to securing regular bank loans; this offers low interest rate, and the fundraisers determine the terms of the loans. They get to decide the mode of repayment as it is conducive to them. This method further exposes the business to more significant opportunities. The risks are attached to the fundraiser’s inability to repay loans, and the investors lose their investments.

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Business Fund Quest

Why Should You Try Crowdfunding? The advantages of crowdfunding are plenty and are suitable for startups who have problems raising capital from other financing options. Consider the following points while using crowdfunding as a financial option for businesses:

a.

It

helps

you

develop

a

good

story;

Crowdfunding offers you a competitive advantage over your direct competitors as your business comes out uniquely by capturing people’s attention and support from the onset.

b.

It

employs social media as a tool for

promotion; Social media plays a prominent

role in crowdfunding. Different platforms allow you to publicize your project and further grow your interested investors and marketers’ network, generating more capital.

Crowdfunding

27

c.

It requires a solid business plan; In a bid to

stand out as a crowdfunding platform, you develop an effective strategy that will attract many investors towards your idea’s prospects. You need to provide them with meaningful details backed by data on the

d.

market and its feasibility and services.

It provides you with a comprehensive and robust network; Aside from posting about

your business on a crowdfunding platform, your plan needs exposure to succeed. Start with your friends, family, relatives (close and distant), and other connections. Regularly inform people about the project’s progress before you start seeking funding so that by the time you start, you’d have momentum.

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Business Fund Quest

Practical Tips that Guarantee Successful Crowdfunding:

a.

Be realistic when setting your goals;

b.

Adopt the All-or-Nothing approach as it is perceived

c.

to be a much more successful option;

Do not hesitate to display your commitment to your prospective customers/investors as this will attract them towards you, and you’d earn their support;

d.

Communicate consistently through active social media platforms, record and address all comments and criticism offered by customers about the page’s project. Proffer solutions where necessary;

e.

Keep donors and investors regularly updated on the development of the project at defined intervals.

Crowdfunding

29

Crowdfunding Statistics Being privy to past data on crowdfunding is essential to ensure a successful campaign. Successful crowdfunding campaigns have shown that:

Averagely, a successful crowdfunding campaign raises about $28,256.

Unsuccessful campaigns barely managed to raise a sum of $824. Most of the campaigns usually fail, and the average amount raised is exceedingly low.

About

22.4%

of crowdfunding cam-

paigns embarked upon are successful, and this is not even up to a quarter of the number of campaigns established in a year.

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Business Fund Quest

Use an attractive video advertisement technique. Stats have shown that crowdfunding

opportunity

raised about

105%

advertisements

more funds than

those without it. They had more customers signing up to partake in the project. Therefore, it is imperative to use the best advertisement technique, and video making is one of them.

Fundraisers, who consistently kept communicated with their followers and prospective customers, raised 126% more

funds than their counterparts who didn’t.

Providing specific personal details also helps attract more investors as this will draw them closer to you.

Crowdfunding

31

A typical crowdfunding project can run for a stipulated nine weeks on average.

It was reported on startups.com that a successful crowdfunding project website has about 300-500 average word count.

Stats have shown that people between

24-35 years of age are more likely to participate in a crowdfunding campaign.

In June

2020,

2108 in 74

there were about

active crowdfunding projects

countries of the world, as reported by the crowdfunding center.

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Business Fund Quest

Summary As highlighted above, crowdfunding is a viable financial option that can be adopted by an individual or a company to raise funds for a business project through donations and investments. The investment/donation is mostly done by individuals or groups of people such as friends, family, relatives (close and distant), strangers, investors, and businesses. Somewhat similar to crowdsourcing, it involves a large number of people contributing small amounts of money to fund a specific project. Crowdfunding provides an avenue that aggregates individual investors, entrepreneurs, and the same banner supplied by the crowdfunding platform and its relative networks on social media and peer-peer connections. It is an unorthodox medium of raising funds. It offers the easiest ways for entrepreneurs to increase their capitals by making the platform accessible to everyone. The common types of crowdfunding are; Donation-Based crowdfunding, Rewards-based crowdfunding, Equity-based crowdfunding, Debt-based crowdfunding.

Crowdfunding

33

Chapter Two

Bootstrapping

What is Bootstrapping? Bootstrapping is an independent financial option to finance their business venture without external investors’ help. The term originated from the expression “to pull up one’s bootstraps,” i.e., to carry one’s weight. In finance, it means to provide all the necessary funds for the business by yourself. Statistics on startups have shown that over

80%

of startups and small-scale businesses started via

bootstrapping as a primary finance source for business. The onus falls on the entrepreneur to carry the financial burden of the company. The entrepreneur has complete control over the entire industry. As a result, it is under no primary pressure from investors and stakeholders. These are the two things to consider when adopting a bootstrapping option for financing a business:

Bootstrapping

35

1

Company Size and Life span

Smaller business owners naturally turn to bootstrap due

to tower capital demands. Their business runs on a modest amount of capital due to the small size of the company. Usually, they are limited to this financial option because they are ignorant or do not have access to other financing methods, such as through investors and other financial institutions. Though already established businesses tend to adopt bootstrapping to pay their employees’ salaries from their coffers.

2

Aim of the Business

An entrepreneur that does not want to give up equity

on his trade can also adopt bootstrapping. The company’s idea as a small business or as a startup can also influence the decision to adopt the bootstrap finance option. For instance, a small business is established to hire

50-100

employees, while a startup has a projected employee count of about 500. These numbers make a huge difference. Due to their high ambitions, startups tend to experiment first

by seeking to finance their business via bootstrapping instead of partnering with an investor to boost the business. Startups value the enterprising opportunity available in self-financing through bootstrapping.

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Business Fund Quest

Techniques for Obtaining Bootstrap Finance Usually, those who adopt bootstrap as a finance option tend to have a primary source of funds. This part might be different from one business to another, but here are some of the ways by which entrepreneurs obtain funds for bootstrap finance: Internal business optimization, z External financiers, z Customers, z Business partners, z Employees z Owners. z These techniques can be mutually beneficial or harmful to one or more of the sides involved, such as, entrepreneur, business partners, suppliers, etc. Stakeholders cannot be ignored in the process of the adoption of bootstrap finances. The higher the number of stakeholders, the easier it is to adopt the bootstrapping technique. Business owners who are students are bound to adopt bootstrapping as a finance option more than non-students. Experience also counts in the sense that entrepreneurs who have not established any business before will seek to self-finance.

Bootstrapping

37

The phases in bootstrap financing for small businesses and startups are: z

Beginner phase At this stage, the financing source

is derived from credit, friends, family, and other related sources.

z

Customer phase The funding is obtained from

buyers, suppliers, and clients.

z

Credit phase This is when a company employs more

workers and staff and attracts venture capitalists and other investors.

Bootstrapping is not meant to be the only funding source for a business, as it is only viable for the short run. A company that wants to go far will have other sources as well to back it up. However, it is a recommendable choice for entrepreneurs to understand better how to run a business and manage the risks involved.

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Business Fund Quest

Advantages and Disadvantages of Bootstrapping

Advantages

z

The entrepreneur has outright control over the business. When the company yields profit, the business owner owes nobody any form of payment and doesn’t have to share profit with anyone.

z

Bootstrapping enhances proactive thinking, and entrepreneurs can develop new ways to generate funds for their business.

z

The entrepreneur is the sole idealist of the business and does not have to consult with anyone regarding financing the business.

z

The entrepreneur avoids the hassle of attracting investors at the early stage of business, which is hardest at that stage as it is challenging to secure investors in that line. Therefore, bootstrapping eases stress, saves time and energy.

z

As the business grows with bootstrapping, investors are naturally drawn to the company.

Bootstrapping

39

Disadvantages

z

It can be burdensome on the entrepreneur as he or she has to face the rigor of making the

tough

decisions

over

the

business

independently.

z

The fund generated through bootstrapping can be minute and is not enough to fully upscale the business. In the case of losses, it can be debilitating.

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Business Fund Quest

Types of Bootstrapping The common types of bootstrapping are highlighted below:

Trade Credit Trade Credit is a form of bootstrapping. There is an

agreement between the buyer and the supplier in a business transaction to exchange goods between the two parties without immediate money repayment. The seller provides the buyer with goods on credit and repays in cash at a later date. Usually, sellers or suppliers do not give out trade credits to new businesses/startups. To secure a trade credit, the entrepreneur has to liaise with an authoritative figure in the seller’s company, such as the Chief Financial Officer (CFO), who might be tasked with regulating tax credits. Such an officer might be able to heed the call for trade credit extension, albeit after providing concrete evidence of your financial plan, the enterprise’s prospect. Then, you can use trade credit to meet your business’s short-term financial needs.

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Conditions for Obtaining Trade Credit

1

Size of the Firm

The smaller the business/firm, the harder it is to

secure funding for the business, and hence, these small enterprises tend to be more liable to obtain trade credit compared to more prominent firms that rarely experience strain on their finances. However, small businesses undergoing pressure in their finances may be unable to secure adequate financing in the form of trade credits, mostly due to their inability to repay the credit. As a result, trade credit issuing companies might restrict their access to their services.

2

Industrial Categories

This goes differently for some industries as they might

function well without trade credit. In contrast, other industries might make more use of trade credit options for ensuring continued operations and activities in the market.

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3

Nature of Product

Trade credits are also not needed by companies that

need to move their products swiftly. In contrast, others who have products that sell less quickly might need advanced trade credits to finance their production operations. The rate of the trade credit can be high as well, depending on the length of the time.

4

The Seller’s Financial Position

This also strongly influences the trade credit supplier’s

stance. Suppose the seller is in a healthy place and thus has a substantial financial reserve. In that case, they will issue more trade credits and extend the time to repay trade credits. Otherwise, the terms of compensation might be strict and afford the little entrepreneur time to repay the trade credit.

5

The Financial Position of the Buyer

This determines the creditworthiness of the buyer. This

factor will be considered by the seller to determine the repayment power of the buyer. Bootstrapping

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6

Risk of Business

Nature of buyer’s business also affects the terms of

trade credits. The seller may not want to lose their goods or funds to an insecure location.

7

Nature of Business

Newer businesses have more competition, usually adopt

trade credit terms that offer a degree of freedom for their companies to promote sales. At the same time, established firms may obtain trade credit on formal terms.

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Types of Trade Credits They are: z

Open accounts This type of trade credit functions

as an informal agreement that allows the seller to supply goods to the buyer, and the exchange becomes the buyer’s liability. The credit is expected to be paid back at the stipulated time by the buyer.

z

Promissory

notes

It

is

a

written

agreement

between the buyer and the seller after exchanging commodities. In the paper, the buyer notes and promises to repay the seller at an agreed date. Should the buyer not pay within the promised period, the seller may demand another document acknowledging another day as the repayment date, and it may detail the interests incurred over the extended period.

z

Bills payable This refers to a module designed by

the seller in agreement with the buyer to repay a certain amount at a defined date. It is a bill that contains all the information about the terms of the transaction. The supplier may use this bill to gather funds in agreeing on a discount with the bank. The bank funds the account, and the buyer will repay the agreed amount to the bank at a later time.

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Factoring It is another financing option that small and medium enterprises adopt to ensure adequate financial supply. A factoring company buys the account receivables of a company, and they handle the paperwork of the company they purchased. It is usually done without notifying customers about the state of their accounts. When a company factors, it assigns its invoice over to a third party company and is funded for an agreed portion of those invoices. Factoring is considered the last gasp option that entrepreneurs can acquire in the absence of other means of securing their businesses’ funds. It helps to reduce specific internal costs.

Types of Factoring

z

Recourse factoring: This financial option is less

expensive than non-recourse factoring. It comprises an agreement in which you can sell your invoices to a factoring company that takes responsibility for their recollection. If the client doesn’t pay back, the factoring company will personally recover the costs from you to cover its costs or request another invoice of the same value.

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Advantages of Recourse Factoring:

z

It is a way of generating quick cash.

z

It doesn’t appear as a loan on the company’s book balance.

z

Your connections don’t have to be actively involved with you.

z

It improves your cash flow.

z

Non-recourse factoring: This is not common among

businesses. It differs from recourse factoring because if the client does not pay back, you cannot repay the factoring company. For it to non-recourse sorely depends on the cause of the client’s inability to pay back, whether due to bankruptcy or closure. However, this has to happen within the stipulated

90

days of the factoring period. One of the perks

to enjoy from the non-recourse factoring is that it is free of credit risks. Before signing off on a nonrecourse agreement, ensure you thoroughly read the agreement.

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Real Estate It refers to physical infrastructural properties. The four

1. 2. 3. 4.

types of real estate are:



Residential real estate: This commonly comprises single-family homes as well as construction and resale homes, quadplexes, vacation homes, condominiums, etc.

Commercial real estate: This category covers medical buildings, shopping malls, offices, etc. The apartments in this category are constructed explicitly for residence through which they generate income.

Land: This includes undeveloped and partially developed lands, farmlands, and ranches.

Industrial real estate: This has to do with industrial and manufacturing buildings and factories where research, production, distribution, and storage of goods is done. Distribution buildings are categorized as commercial real estate. It allows for construction, zones, and sales to be overseen separately and effectively.

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Real Estate agents assist sellers in finding buyers through their professional contacts. Negotiations are carried out on behalf of the seller to get the highest possible price valuation for the property. Agents market and carry out the publicity of the property in an attractive way to the customers. The buyers have their agents who provide similar services by sourcing viable real estate sellers in the local market. They also negotiate on behalf of the buyer to get a lower price from the seller. It exists as yet another viable way to finance your business. Some of the advantages of real estate to the entrepreneur include:

Leasing

The entrepreneur leases out the property instead of selling it. The buyer gets it on a lease paying an agreed amount within a stipulated interval. Leasing helps to manage costs easily. The terms of repayment can be made to suit the rate at which the business is growing. Buyers looking to buy a property can agree to repay at specific intervals that may spread over the years.

Appreciation in Value and Equity

The buyer earns the advantage when the property appreciates as the property becomes an asset. Such a property can be used in securing financing as long as the value never drops.

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Equipment Suppliers The common problem faced by most startups can be traced to inadequate equipment. Many hesitate to invest heavily in buying equipment for fear of running out of funds for the business’s running costs. The company will also be limited without the right equipment. The solution to these problems lies in the approach. The entrepreneur can choose to buy on-hire purchasing from the manufacturers and gradually repay overtime at agreed installments. However, an agreement must be reached, drawn, and signed. Two types of arrangement that are used in procuring equipment are:

1

Conditional Sales Agreement

This agreement/deed documents the terms of an

exchange where the supplier supplies the buyer with the equipment. The buyer assumes primary ownership, but the supplier withholds the equipment’s receipt and deed until the buyer fully completes repayment. The buyer may continue to use the equipment until the full payment is made but doesn’t have the ownership rights over the items. If the buyer is incapable of repayment, the supplier can seize the goods and reclaim them. This agreement is used for products such as vehicles, work tools, and equipment. It starts with a verbal agreement, which is

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then transformed into a formal written agreement. The content of the contract may include specific details about the property, such as: z z z z z z z

Type of property



Condition of the property



Amount payable



Date of Payment



Rate of Interest Due delivery date Date of title transfer; This stipulates when the buyer

can officially be tagged as the equipment owner upon repayment.

z

Conditions for Repossession; This

includes the

details of the terms that, when violated, can be the reasonable grounds for the repossession of the property.

This type of agreement’s significant advantage is that it enables startups to grow better at the early stages. It stands in the gap to assure the supplier’s recovery mode if the buyer fails to pay. Most companies that are unable to secure finance for their business can adopt this form of agreement.

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2

Chattel Mortgage Contract

This contract is a financial agreement that enables a

buyer to secure funding from a viable source. In contrast, the financial provider accepts the business or property as collateral. It is not in any way different from a regular mortgage and as expected if you are unable to pay. The supplier can reclaim the equipment. The key benefits are: Repayments z

can be made in installments and

spread at defined intervals for 2-5 years, depending on the property’s value.

Lower Interest rates z Flexible repayments z An agreed balloon payment can also be decided z upon at the end of the term if a certain amount is unpaid at the end of the period designated in words.

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Leasing Leasing has become common practice, and it is familiar to real estate. It is advantageous to both the small business owner and the person leasing out the property. The person who obtained the lease gets to pay for that asset in smaller amounts, and the deal ends after the leasing period is completed. The owner also benefits from the property’s value and may also enjoy the relevant tax benefits. There are two types of leasing. These types are differentiated based on the risks involved, the agreed leasing period, and the number of beneficiaries from the deal.

1

Finance Lease

Here, the owner transfers all the associated risks and

rewards of the assets’ ownership to the person obtaining the lease; this means the lessee inherits both the assets and liability associated with the lease/property. In this type of leasing, the person getting the lease virtually becomes the owner of the property. It has an indefinite period for recovery and can be followed by a secondary but shorter period allowing for a full recovery.

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2

Operating Lease

In operating lease, the owner does not transfer the asset’s

risks as in the financial lease. It comes in the short term, and it is useful for as long as the purchase is viable. As a result, the total investment may not be recovered during the period of the lease. It is also known as the service lease, and it covers all things relating to repair and maintenance to the owner.

Specific alterations can be made in a lease to strengthen your cash position. These include: A low-down-payment or none at all, z Maintenance and repair costs, which are high, z Prolongation of the lease term for a period spanning z the calculated viability of the asset,

Addition of the option to buy the property when z the lease ends,

Adjustment z

of

payments

unforeseen seasonal changes.

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to

accommodate

Advantages of Lease Financing Some of the benefits of lease financing are: 1. Certainty:

Lease agreement is medium-term funding facilities that cannot be recanted, only if payments are due. Keep in mind that these agreements are long term agreements. 2. Budgeting:

Lease agreements help keep the cash flow for business in check and help predict the cash flows. 3. Fixed-rate Finance:

They have set repayment terms and can be beneficial in cases of low-interest rates. 4. Security:

In the lease agreement, the lessee has the right to ownership of the property until the contract ends. It offers more security and gives room for them to provide better terms. 5. Tax Advantages:

Businesses have the luxury to take advantage of capital allowances. If a business cannot pay tax, more profitable for the business is a lease agreement. The leasing company takes the capital allowances and passes the benefits on to the place.

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Customers Customers sometimes serve as a source of financial aid, and it is a pleasant medium to maximize assets. There are different ways to which we can do this; one is the issuing of a credit letter. A credit letter or letter of credit is a tool that guarantees payment to a marketer of commodities majorly for easing trade finance. The person purchasing the goods from the marketer takes interests with assurance to pay for the goods later. With a credit letter, the payment obligation shifts from the buyer to the issuer of the message. You can be issued a letter of credit from your customers and use it as a security to purchase goods from a supplier. A letter of credit is usually regular in foreign exchanges. We have a few types of letters of credit. They are a revocable letter of credit, irrevocable letter of credit, revolting letter of credit. Credit letter is also red clause letter of credit, commercial letter of credit, and standby letter of credit. Most beneficiaries do not approve a revocable letter z

of credit, so they are usually not expected; the The Uniform Customs and Practice for Documentary credits (UCP) does not make provisions. In this kind of credit letter, you can legally cancel the exchange at any point in time.

The irrevocable letter of credit is usually standard z compared to the revocable type, as it is not legal to

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cancel an exchange at any point in time. It can only be confirmed or unconfirmed. The confirmed letter will need another financial institution to guarantee the payment, which comes from distrust between the beneficiary and the bank or second party. People can use the revolving credit letter for more z

than one case; it is especially common between parties who expect to do business together regularly. Though this type of credit letter often has an expiry date, the most common is a year.

The red clause credit letter has an unsecured loan z

by the purchaser, which comes through as an advance. Individuals or businesses often ask for a red clause letter of credit when it needs funding to transport or manufacture goods.

A commercial letter of credit can also be referred z

to as an export and import letter of credit, and they used for international trades. The UCP brought out by the international chambers of commerce is often what commercial credit letters work with.

Standby z

letters of credit are mostly used as

insurance instead of for financing. If any party fails to get their compensation, they can provide this letter as a form of proof to show that they have been unable to receive their payment. Bootstrapping

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Ways of getting feedback from customers and reaching out to them for your business are:

1. Give Out Free Samples:

When you start a business like opening a coffee shop, where you can hand out free samples to people around, it would be of great benefit to your developing business to give out samples to your prospective buyers.

2. Attending Events as a Medium to Promote Your Business:

If you have an idea of any event coming up where you’d have a platform to interact with your targeted audience, avail yourself the opportunity, to get customers acquainted with your product and services.

3. Using Professional Assistance:

You can use apps and services to help you reach potential buyers’ interests and reduce costs.

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Second Mortgage A second mortgage avails you the opportunity to borrow against your house, which is an asset that continually increases in value and worth as time goes on. They are the Home equity line of credit (HELOC). You can also call them home equity loans. They are usually used as finance sources for your business, which may not necessarily require you to sell your house. A second mortgage essentially uses your home as a kind of collateral. Because the purchase loan is first to be repaid if your house gets to the foreclosure phase, hence it is called a second mortgage. We have two main kinds of second mortgages:

1. Lump-sum This is a kind of one-time home equity loan that gives you a lump sum of money to use as a source of funds for a particular project. Repayment is made in installments. Every payment made has its interest attached, with a form of amortization, a portion of the balance loan.

2. Line of credit You can also borrow by exploring a line of credit. The loaner sets a limit to the amount to which you can borrow. You can borrow continue to borrow until you get to that limited amount. Bootstrapping

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Advantages of the Second Mortgage

z

Loan amount: When you use your home as

collateral, you can access more funds than when you use some other collateral form.

z

Interest rates: Usually, second mortgages have

lower interest rates than other loans because you borrow against your own home. Loaners tend to be soft with the interest rate.

z

Benefits on tax: In some cases, you can take

mortgage interest reduction; before demanding loan reduction; you should ask task preparers and get familiar with the technicalities involved. This way you will be able to understand what you are getting into.

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Disadvantages of the Second Mortgage

z

Risks: The major demerit associated with second

mortgages is that you are putting your home at risk. The moment you stop making payments, you begin to lose your home, and it can, in turn, affect your family.

z

Interest costs: The interest rate on second mortgages

is relatively low than that of credit cards, but it is higher than the first loan rates.

z

Loan costs: Second mortgages take up appraisal,

organization fees, and some other things, making them very expensive.

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Summary Bootstrapping is just a form of building a company from scratch with nothing but personal savings. Exceedingly limited resources can suppress development, hinder promotion, and even weaken the bootstrapped product’s quality. Bootstrap entrepreneur maintains complete control of the business and has the luxury of solely making all the decisions. Bootstrapping can be used to finance startup in the short term. It can be a feasible option for the entrepreneur as it helps an entrepreneur understand how to run a business, the risk attached, and how to create business relations. But companies shouldn’t run through bootstrapping methods as it will need additional sources too.

Methods of bootstrapping are Factoring, Real Estate, Trade Credit, Leasing, Customers, Equipment Suppliers, and Second Mortgage.

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Chapter Three

External Sources

What is External Sources? An external source of Finance/Capital is a term that encapsulates the real idea of finance. External sources of finance for your business are preferred stock, equity capital, debentures, venture capital, leasing, trade credit, bank overdraft, factoring, term advances, and lots more. When we refer to external sources, we talk to refer to the capital engineered from outside of the business, not internally created out of the company’s activity like retained earnings. External sources of finance are those outlets of finance, which arise from outside of the business. For example, retained earnings are an internal source of financing, while banks’ loans are external finance sources. External sources of assets can be divided into the long-term and short-term sources of funds. Some turn of events at every phase of your business will leave you to require bits of help and solace that can only be

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found by reaching out for enough funding for your back up. Nevertheless, as much as it is an essential element in the development, manageability, and advancement of your business’s long-term standing, capital is not as easy to get as you imagine. It is incredibly vast sums of money. It makes using your savings and reserve fund more appealing, as you can easily access those funds. However, that will only lead to further issues later in your business’s future growth. Preferably, a smarter plan would be to access what external source of finance has to offer. Even though it can be an unbelievable means of generating capital for your business, it is also an option you shouldn’t just fiddle with. So, to come to terms with the right choices, profiting your business, understanding the benefits and drawbacks of external outlets for finance becomes very crucial.

Advantages of Using External Sources of Finance Possibly the best advantage of utilizing external sources of funds is that your business approaches a broad scope of business finance arrangements. Instead of draining your reserve funds or drawing supports from critical grounds in your business, you already have access to a variety of funding sources available to you, supplying you with the way to raise and obtain the capital your business needs. External sources of finance can also be utilized since many offer items are not dependent upon specific utilization limitations. They can be used to profit any part of

External Sources

65

your business. You can use it to acquire new equipment, new property, support uneven cash flow, finance marketing campaigns, renew supplies, provide crisis help, and lot more. This enables you to spread out enormous costs and make them progressively manageable. Moreover, multiple offers are accessible for a broad scope of money-associated circumstances, depending on your picked item. Irrespective of whether you have a bad credit rating or lack any business resources at present, you could, in any case, utilize external sources of funds to keep advancing your business.

Disadvantages of Using External Sources of Finance External sources of finance are an essential tool for your business’s tower; using external sources of money also has its disadvantages. Since utilizing business funds often includes interest, lender service charges, and legal costs, supporting your business through these will cost you more than using your capital. On the other hand, even though having an unfavorable credit rating may not necessarily lead to your business being dismissed (depending upon your chosen item), it will directly affect the percentage of interest you’re charged all through the agreement. Hence, the weaker your credit rating is, the pricier the deal will be and vice versa. That’s why before applying for business finance, you need to consistently create a credit report to recognize any issues

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and discover a solution, if possible. And also, since loan providers will steadily do any necessary checks, including whether you have any recent or past CCJs, Accelerated Payment Notices, unresolved debt (for example, credit card debt), and your history of repaying debt at the given time. Additionally, some money arrangements may demand your business to introduce collateral as security. This takes the form of unencumbered assets, for example, equipment, hardware, vehicles, land or property. However, a few items may use different techniques to give security, for example, the collateral tied to the unpaid businessto-business invoices. Though this could help raise the lender’s certainty and spur them to offer a progressively positive intrigue. Still, it does leave your assets in danger of repossession if your business defaults on the installments. Also, there are unsecured items accessible; however, they regularly have higher interest rates and stricter application necessities because of the lender’s increased risk.

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Types of External Sources

1

Angel Investors

Angel investors are established wealthy people or

gatherings who fund new businesses, commonly known as equity financing. These deep-pocketed investors can help finance a new startup’s establishment or help facilitate a newly found trade. They are always ready to commit their resources to new businesses.

What are Angel Investors? Angel investors are branded by their riches and readiness to put resources into new companies. These Angel investors take risks on new organizations since they need to earn a high return on their investment. They are not always content with slow and steady development. They need to see brilliant growth in their equity. They are not a homogeneous group of people. Few of angel investors are a piece of angel investing groups. Some follow up on their own. A few of them are skillful in putting resources into privately owned businesses while others fly on a whim. Few prefer to be intensely engaged with the company’s day-by-day operations and not only put their

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resources into a startup. Others prefer not to assume any role in the organization than just to see their investment grow. There are particular kinds of small business companies that angel investors often prefer, the ordinarily hot, highdevelopment enterprises with a great deal of media buzz. These inclinations change as often as the patterns do. Also, more extensive economic events may affect angel investing attitudes. Angel investors may or may not be assigned accredited investors by the Securities and Exchange Commission (SEC). SEC defines accredited investors as those with a yearly salary of at least $200,000 or a net worth of $1 million (excluding a primary residence). Businesses are

permitted to sell shares to these accredited investors without taking the regulatory steps they need to sell shares to non-accredited investors.

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How does Angel Funding Work? Whenever an angel investor finds a business thatinterests (or the other way around), they start negotiating on the money to be invested and giant of a stake in the company that purchases them. Angel investment is risky. It generally represents a little part of an angel investor’s overall portfolio. If an angel investor’s investment portfolio aggregates $1 million, they may just put $100,000 toward angel investments. Most

angel

investors

think

thoughtfully

before

contributing. They will perform a competitive analysis to familiarize themselves with the business. They may require numerous meetings and a few rounds of presentations from the organizations before they agree to invest.

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Finding Angel Investors Getting an angel investor has been made easier by some online services that render this service. Online services like Gust offer to interface new startups with potential investors. However, meeting with an investor in person is better because it brings you the possibility of being on the best foot than sending an email to someone’s inbox. So, organizations in need of an angel investor can begin their search on the web or in person. And can also connect with local lawyers, accountants, and bank offices to check if they are aware of any angel investors in a particular region and niche.

Whether on the web or faceto-face, getting funding from angel investors is a complicated procedure.

The chances of progress are long. Just that, regardless of whether you get an angel investor or not, you are liable to make contacts or get helpful advice. An investor might not have loved your present strategy, yet perhaps you’ll have the option to return to them with another in a couple of years. Each introduction should be seen as a chance to learn and pick up understanding instead of doing or dying for your whole profession. External Sources

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Advantages and Disadvantages of Funding with an Angel Investor for Your Startup In case you have not been successful in locking financing for your startup, an angel investor may be your answer. An angel investor spends significant time offering funds for the entrepreneur and business person in different startup development stages. Though the finance they bring to the table may have a substantial effect on whether your idea ever gets launched, yet, there is a couple of trade-offs, you should be aware of dealing with them. Advantages 1. An Angel Investor is Willing to Face a Risk

Being qualified for a small business loan commonly involves skipping through a couple of hoops: challenges you probably won’t be confronted with while dealing with an angel investor. It is so because these “angel investors” usually are settled entrepreneurs themselves, who comprehend the degree of risk included and are at ease with taking it on. So, even if the bank consents to offer you the funds, they may limit the amount eventually approved since they want to reduce their loss. Angel investors are not like that. They typically don’t return from making a more significant investment if they have faith in their capacity. An angel investor can generally “smell” a good plan and the right arrangement.

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2. Cash isn’t a Loan

Taking out a loan, your bank expects you to repay it, regardless of whether your business succeeds. For an angel investor, he/she works inside an alternate system, they offer you the capital expected to get the show on the road, and in return, they get an ownership stake in your business. If the startup takes off, both the angel investor and the business owner receive the financial benefits. And if your organization does not succeed, an angel investor won’t anticipate that you should repay the offered funds. 3. Chances of Success Rise

Angel investors usually bring years of skill and expertise to the startup’s table, and they already understand the supports it’ll take to get success to your business. Some Harvard Business School researchers ventures supported by angel investors are bound to stay in business longer. They are also bound to have significant development, and witness a more bulging pace of return. If you are looking for direction, counsel, and financing, angel investors offer plenty of this - valuable information.

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Disadvantages 1. An Angel Investor can Raise a Higher Bar.

The disadvantage of an angel investor’s higher capacity to endure risk is that they always expect a better result. They want to make money. Considering there’s a significant amount of money involved, they would require to get a good payoff, just like every other person. Angel investors expect a return rate that is almost ten times their initial investment for the first 5 to 7 years shouldn’t be surprising. At that point, when you are faced with such circumstances,

the pressure to bring forth might be the utmost. When you deliberate whether to get involved with an angel investor, examine and see if the startup can grow at the pace expected by the angel investor. 2. There is Always Something at Stake.

Not neglecting that you are not officially obliged to refund your angel investor the capital they tender, there’s a catch. As you give your business’s equity as a part of the deal, you give up a part of your future profits. The rate of ownership demanded by the angel investor will be based on the amount they are pumping into the investment. In a situation where you expect incredible success from the business, it may bring about more money you won’t be able to claim later. When you have a proposal presented to you by an angel investor, meticulously study the terms to ensure the amount of ownership an angel investor is asking for, doesn’t hinder the possibility of your profit realization.

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3. You don’t Have Total Control.

An angel investor will not release an enormous amount of cash without considering how well the fund is being used. If you expect they would adopt a hands-off strategy, you will probably be shocked that you thought wrong. Considering all things, the angel will be a significant part of the decision-making that will influence the business outcome. Whether they give you control or not, you will still have to take responsibility for clarifying the reasons for your choices. Before you do business with an angel investor, ensure you wouldn’t have issues with someone you aren’t acquainted with, playing a significant role in your business.

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2

Family Offices

Organizations currently rallying around intending to

raise funds for venture investment face some hard realities they can’t afford to do anything but learn from. Essentially, VC dollars are not as easily accessible as they used to be years back. And for businesses with viable opportunity to succeed, these funds see the terms becoming less appealing by the day. The elating news, though, for new companies seeking finance, is that another direct investment route is growing: the family or multi-family of well-to-do people and families. Family offices are essentially a pond of wealthy families’ money. These are backlogs where the main goal is a long term, stable investment with a secured tax-efficient return. They also have a great fluidity in the kind of assets they venture into, as they don’t have any stiff-necked investment policies, limitations, or principles from multiple stakeholders. Moreover, because they are not in it for a quick exit, but a longterm kind of piggyback on an organization’s long term growth, their incentives regularly work in harmony with the entrepreneur. This makes it win-win for entrepreneurs and investors.

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The problem with family workspace is that they usually don’t have a site, don’t make an advertisement, and locating them on Google is more or less playing the lottery. That is why angel investors network and system and generally incredible places to get a scoop on the hidden pond of money and a form of introduction to individuals who have the keys to this pond.

Obtaining a Willing Family Investor For startups, it is imperative to source for financing options that offer entrepreneurs certain benefits. It all starts with seeking for investors in the immediate connections the entrepreneur already has. It is one of the things you stand to enjoy when you first install a board of directors. There is an excellent probability that investors will rise from that crop of individuals. However, if there are not enough people to fill that role, other opportunities might arise, such as angel investors and family offices. It truly boils down to how vast your network is. A right family office signifies a great entrepreneur with good connections from the natural disposition for corporate or human relationships. Through this, one can connect with successful entrepreneurs in the same field who have an established family office or are involved in a viable investment setup that aid startups. You will get to rub minds with these entrepreneurs and also tap into their stream of experience. The chances of securing investors are waning for startups. Still, it is important to seek alternative financing sources and reach out to connect and find a viable investor in the family. External Sources

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3

Venture Capital

It is a form of investment in which the investor finances

a promising business venture in return for a percentage of equity in the business’s long-term prospects. Investors are referred to as venture capitalists, wealthy individuals, banks, firms, etc. The interest of venture capitalists is usually drawn towards businesses with high potential. However, the investment is not restricted to money alone, but business ideas and technical support. These come in handy for startups new and established. It is a high-risk investment. The investors tend to invest a huge amount of money to secure their interests in return for a handsome payoff when the business succeeds. While it may be difficult for new companies to obtain funding due to their relatively short operating history, if any at all, venture capitalism is a viable option for raising capital. Especially when they need legwork to succeed in the market or obtain bank loans or other financing options, a business can benefit mainly from venture capitalists’ influence. The only disadvantage is that the entrepreneur loses equity and does not have total control over the venture.

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Approaches to obtaining venture capitalists can be distinguished based on three factors:

1. Geography (ex. Canada, Asia, Global), 2. Stage (Seed, Series A, Late Stage), and 3. Sector. If an entrepreneur wants to land a venture capitalist,

1. Preparing

a list of viable venture capitalists

comes first.

2. It should be succeeded by in-depth research into their current activities in the capital market.

3. Contact the staff. You’ll be able to avoid stress if you find an investor who will pay attention to you and your business.

4. Prepare an outstanding presentation to attract a positive response from the venture capitalist.

5. Ensure you are well informed, and your venture is safe before signing any agreement with a venture capitalist.

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How to Generate Venture Capital Funds As defined earlier, venture capital is a financial option that allows investment in startups and new small businesses in return for returns on the investment. For it to work, it requires an investment firm that helps gather funds from high profile individuals or firms with interests in investment in smaller businesses. The viability and portfolio of the investment firm can influence the interest of high net-worth people. It assures them that their funds will be appropriately managed. In addition, it will be maximized to yield significant profits over time. Two factors naturally affect how this is done: I. Nature of venture capital companies and II. Their degree of risk-taking These determine how the funds generated will be applied. Such funds can be used at different stages of the development

0f

the startup. The steps of funding, also

known as series financing, include early-stage (Series A funding), growth stage (Series B funding), and late-stage (Series C funding). To cash in on the returns, venture capitalists can exit when the startup is at the phase of Initial Public Offering or acquisition. It is when they can sell the shares they own in equity to new shareholders. Venture capitalists can also provide expertise or other related services or lend infrastructure to boost the startup’s operations.

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Business Fund Quest

Structure of a Venture Capital Firm To understand how venture capital works and the perspective from which the venture capital firm functions, you must understand the fundamentals of a venture capital firm’s structural components and how it affects their operations. The first strata are occupied by the real investors who provide the funds for intending startups. These startups and corporations are termed Limited Partners. They are investors and nothing more. They only invest the money, but they have no hand in how the funds are used or managed, but they remain an important pivot in finalizing venture capital deals. They profit from the returns of their investments they use to fund the venture capital firm.

1. 2. 3.

The critical roles of the general partners are:



Fund management and disbursement to startups

Handling investment decisions,

Development of strategies to identify the right business for portfolio startups. External Sources

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The general partners earn their keep by investing the funds provided by the limited partners they support and net profit. They make deductions out of the profit out of the returns and pay the limited partners. The firm chooses new startups in a specific industry. It then invests capital in them after conducting a significant evaluation of the business plan and determining the prospects. To ensure high returns and a successful venture, the firm gains the rights in a new company’s vital decisions and policies.

Assessment of Venture Capital Startup before Funding Many factors can influence a venture capital firm’s decision to invest in a particular sector, such as the risks involved, the global market, and other conditions peculiar to the industry. Another thing that is considered is the ability of the new business to earn returns. This potential will be the ultimate sign of success. As a result, venture capital firms strategically evaluate a place’s potential to yield returns, depending on its business plan and relative relevance to the market. The business idea is scrutinized to see if it is foolproof, and if the products and services have traction and will generate high returns. The information derived from this is also used to evaluate the long-term benefits of investing in the business. The recon tests the viability of the business’s products and services in the global market and its entrepreneur or owner’s reputation in the industry. If it all weighs out promising enough, the venture capital firm then invests in the business and gains equity.

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Business Fund Quest

Difficulties for Venture Capitals Irrespective of the time and resources committed to evaluating viable new businesses by the venture capital firm, there remains the customary risks attached to every business venture. It comprises the other forms of risks that may be out of the venture capitalist’s control, such as changes in the organization’s hierarchies, market loss, awful business choices, competitiveness, etc. This sums up the high-risk nature of venture capitalism. The risk of having losses is high, as is peculiar to new businesses. Other factors, such as a recession or other economic conditions, can affect the new startups.

Monetizing Investments Every business’s goal is to generate profits, and it is the same for venture capitalists as they hope to earn from investing in companies. The investment length can last

8-10

years to give the startup enough time to grow and

yield profits. At the end of this period, the business is expected to reach the Initial Public Offering (IPO) phase to attract larger acquisitions. The venture capital firm sells its equity to the intending shareholders. It thus earns profit from the merger, IPO, or business acquisition. From the sales’ returns, the limited partners are then paid for their investment, and the remainder is the profit of the venture capital firm. The venture capital firm may opt to External Sources

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use the returns to pursue other ventures that may yield more returns. However, suppose the business shows signs of failure. In that case, the venture capital firm can opt-out earlier and earn money by selling its equity to cash out the cash by selling its equity.

Moving past Financing. To follow up on their investment, stakeholders go beyond pumping money into the investment and backing their portfolio’s buildup by contributing the market survey, skills, networking privileges, expertise, and investigations. These often are attached package with the investment capital backing round. This influence helps place an upcoming venture in good standing in the market to stand head to head with risks. This increases the possibility of profits and interest for the investment capital firm. Furthermore, new companies can regularly find synergy with other new businesses under a stakeholder’s portfolio, and these influence the growth and trademark value of upcoming ventures positively. For new businesses testing international markets, investment capital backing can provide the capital, and the connections gained in the market and expertise to be responsible for overseas growth.

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Business Fund Quest

Balancing Profit with Loss Virtually almost all new companies turn out to be unsuccessful. The high probability of failure brings about how investment capitals adjust to the different situations of bad luck or disaster. To shield their investment somewhat, stakeholders bill the management carrying cost and expenses above the enormous measure of benefits they get from a productive exit. Moreover, when upcoming ventures get investment backing, it has shown a grip and the investing capacity of the investment capital counterbalance of high-risk ventures and ventures in the growth phase. Companies that are regularly sure to generate returns. Like every venture, investment capital companies need to have a grasp of a more significant portfolio. With digital innovations having a substantial impact on the markets, especially in places like India, and as customers desire to evolve, sectors like e-Commerce can easily be improved on and become a better niche to invest on. Consumer services and hyper-local delivery have thrived. With investment capital-funded upcoming businesses succeeding in India, investment capital backing has become an essential route for new companies.

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4

Crucial Shareholders

Companies that invest or personnel who support

intending to get crucial benefits rather than the financial rewards are known as ‘Crucial shareholder.’ An example is pumping resources into a new product. To have a very significant say in its future development, instead of making lots of money from its sales, it is a Crucial Investment. Therefore, this is another source of funding for a new business. A crucial shareholder is a more prominent company, literally in the same industry as the company. Compared with the investment capital, an essential shareholder is usually less hostile on estimation or appraisal, meaning a crucial shareholder is ready to take a relatively fair position in the upcoming business for a certain amount of money. Likewise, the essential shareholder will regularly be less aggressive with force or discipline in making decisions. A crucial shareholder will look for a suitable position in your company that is attached to something else. ‘That something else’ is what makes the essential shareholder different from the others. The most common way to identify a crucial shareholder is to desire a license arrangement, marketing or distribution arrangement, a form of cooperative development understanding with your business, or even an option to buy your company

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Business Fund Quest

more often than not. A practical example is that a crucial shareholder may need your business to license the latest innovation. The shareholder may desire your company to enter into a corporative development agreement. You agree to create a novel product or a new technology mutually as one, the crucial shareholder. This is mostly used in creative niche. A producer may give a certain amount of money to an artist, film producer or musician to produce a painting, movie or an album which will be sold for a certain period of time.

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Things to Consider when Seeking a Crucial Shareholder At that point, where your business requires nothing but money, you recognize an investment capitalist or an out of the blue investor as the finance source. Don’t purse crucial shareholders only because you think you will improve valuation than obtain from an investment capitalist. Nevertheless, if you wish for a relationship or a big player in your industry, go for a crucial shareholder. In the place of considering a shareholder as a point of supply of funds, have these in mind:

1. Choice of Partner

Locate a body or group of crucial shareholders. You choose the essential shareholder you want to be recognized with. Critically decide if your business would benefit by working with a partner with a cultured network that can provide you with the right channel that would aid your business immensely? Would your company help by working with a leader in the industry who has perfect sales and marketing strategies which your firm lacks, “the standing giant”? Would accepting your business in the market largely depend on a partnership with an already established player in the industry, who has the perfect status and respect in the market? Examine and decide where your business needs help and locate those crucial shareholders who can give your business exactly what it lacks.

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Business Fund Quest

2. Access and Work toward it

Make a plan of how your company will approach the significant crucial shareholders. Does anyone in your network know how to get to one of the essential shareholders in the industry? You can use an expert consultant in a different vein, like lawyers or those who keep records (bookkeepers). It may catalyze your connection to a crucial shareholder. Look out for any investment bank that can help your approach to the essential shareholders. Your target should be setting up a meaningful professional working relationship with someone who has great authority in crucial shareholders.

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3. Evaluate the inspiration of the Crucial Shareholder to Invest in Your Company

Envision what the crucial shareholder will desire from your company and see whether you are willing to agree to their terms for the help required. Make sure you get to digest “something else” that your company’s crucial shareholder needs and evaluate the impact the “something else” will have on your business and its future growth and exit plan. (Sale, IPO, and so forth). In a situation where a crucial shareholder looks for a license to your new technology, you should consider if your business can afford to give an exclusive or non-exclusive license. What scope of license would it be? How long would the rights last? In which region can the crucial shareholder use the innovation? If the shareholder seeks a cooperative development agreement, see whether your company will share ownership for improvements. Which aspect of the joint corporation is your company responsible for? In case your exit strategy leads to the sale of your company, can you persuade the crucial shareholder to take the “first negotiation right” instead of the first right of refusal,”? The first right of refusal has an impact on getting other bid options for your company and should therefore be consciously avoided whenever you are making efforts to negotiate.

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Business Fund Quest

4. Give More Time for the Funding Process

A crucial shareholder’s investment usually needs approval from within its administration. In other situations, its Board of Directors and it is required to move its way to the internal legal section. So, you ought to be ready for long-winded negotiations. You will probably need to use a binding term sheet that is not from a legal practitioner or letter of resolution when you start the negotiation process. The message of the solution or the term sheet can serve two purposes. Firstly, the document will stand as a form of contract to keep the crucial shareholder at bay. This is to make them bank on the start’s guarantees. Secondly, the documents help to clarify the shareholder’s arrangement terms.

5. Work with Your “Backer”

You need to build a professional working relationship with someone inside the crucial shareholders’ association to magnify your business. Your backer can be of help with moving your proposal through the corporate bureau and political phase. In like manner, your backer can help with finishing the deal after your submission might have been agreed upon and signed.

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6. Carefully Negotiate Terms

Meticulously define the spheres of the deal arrangements. As a new business, by having it in mind that a critical strategic relationship may not be feasible, you won’t handle the cost of a claim against the crucial shareholder if things don’t turn out as planned. You need to be meticulous in the funding negotiation so you can conveniently pull out of the deal if you suspect it wouldn’t be the best option for you. Be cautious, and be mindful of being puzzling. If you make the terms unclear, it will help the crucial shareholder get the legal claims.

7. Prepare to Start

While organizing the financing, you need to meet with your crucial shareholder to agree on how the partnership will be executed. This meeting will help you foresee how much resources and priority will be accorded to the crucial shareholder’s collaboration. For instance, how the partnership will pan out after it has been agreed on. And after that, what you learn will help mold the league or lead you to alter your view.

8. Flexibility is Necessary

Be open to other alternatives for your funding. In case any crucial shareholder doesn’t keep to their end of the bargain, you can look for your funds from other sources.

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Business Fund Quest

5

Bank Loans

Sourcing funds for upcoming business is one of the most

challenging hurdles an entrepreneur would most likely face when venturing into any business. There are several outlets where funds are accessible. It becomes necessary for an entrepreneur or business owner to carefully study and understand each of these funding outlets’ benefits and flaws. Calculate and weigh how much funds are needed to execute the business. Apply these funds judiciously, and ensure you follow the business’s projected financial stance, including the profits. Work on the generated funds and develop a plan of action to work with and get the necessary funds. With investment capital firms and angel investors gaining wider recognition as an unlikely source of funding for upcoming businesses, large numbers of entrepreneurs are not aware that major financial institutions like banks are also a viable source of financing for an upcoming business venture. Banks are the most extensive and most reliable financial support for new companies in India, allocating funds to numerous upcoming and fresh companies yearly. Loans from the bank are usually relatively fast and easy to approach. They are a quick means of generating funds for your business, and though it has a stipulated time frame External Sources

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attached it. And these loans can be interest-only kind or a capital repayment kind. They can be explicitly designed to meet your business needs. Companies aiming to purchase commercial mortgages or business premises have greater chances of accessing loans and usually get flexible terms. They can either be a long term or a short term loan. It solely depends on the reasons behind the loan. Regular use: bank credits, in most cases, are used to get funds for upcoming capital and, besides, for more significant, long-term purchases.

Cost: These

are five (5) main cost principles that

should be considered.

1. 2. 3. 4. 5.

Agreement fees. Interest rates. Professional expertise. Insurance. Convent compliance costs.

Bank loans are usually allocated at a particular cost. There might also be other additional charges or fees attached depending on the type of loan and the person lending the money out. Agreement costs are administrative charges paid to the bank to keep the funds and cater to the initial expenses. The amounts vary depending on the business’s complexity, how

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Business Fund Quest

big it is, and the risk factor. The interest varies depending on the risk of default. The most common kind of interest rate is the fixed or variable kind. Insurance is also a factor that can aid your loan application grant, especially the “key person insurance.” This kind of insurance varies, mainly because of the health history of the insured person. When the bank’s loan is secured, it’s easier to obtain better rates as the risk of the person lending the money out is low. The business assets can be the borrower’s security, a guarantee of safety for a third-party. Financial

organizations

and

banks

alike

provide

monetary aid to companies and firms in all business spheres,

regardless

of

their

current

phase

in

the

company’s lifecycle. New businesses can benefit from a more significant class of term loans or working capital, depending on their requirements. Banks are happy to loan even for modern enterprises. They are satisfied with the business model, the capacity to pay back the loans, estimated returns from the business, the management expertise, and other provided security. If you are starting a business in a particular region, where companies or businesses have not been already set up, banks will ask for more extensive collateral security, usually with multiple sources or alternative income sources. Suppose an upcoming business with a peculiar or unusual business model can provide the same protection level. In that case, the bank will lend to them.

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Getting a loan from a bank for research work on technology is highly possible. Asset-backed loans could also be used for constructing more updated innovations, different business growth efforts, and or marketing. The asset-backed loans are awarded regarding the market value of an industrial, commercial, or residential property. Banks can lend as high as 70% of the property’s

surveyed market value with a loan time frame of about

7-15

years. Also attached to the collateral security

offered, the supporters should provide evidence to the banker. This will indicate that the financial returns expected from the business and source of finance meet up with the loan interest. It will also show that principal commitments are in place. An upcoming business can also get term loans from banks to purchase equipment and machinery. Banks are rapidly becoming more encouraging regarding loan extending for purchase, putting together, and commissions of capital assets. Practically, machines for use in business. An upcoming business can get capital loans from banks to give credit to clients or load stock inventory. Banks will do their best to judge a business’s working capital requirement, depending on the estimation provided, and take a cautious approach to lend working capital funds. Before approaching a banker or an investor with the funding request, the business’s advertisers should initially

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Business Fund Quest

set up a pitch that clarifies the business plan, promoter’s foundation, revenue model, estimated sales, evaluated profit, and evaluated development rate, and returns. Return on investment is an essential condition for both the banks and the investors. This way, it is significant for the promoters to assemble, familiarize, and compile the data in a presentable format first (could be a Detailed Project Report). When the investment pitch is prepared, the promoters must keep potential identity banks with plans or the facility for giving the mentioned funding. When the two stages are completed, they can move towards the financiers (bankers), present the pitch and funding requests. Here are a few benefits for upcoming businesses who intend to obtain loans from banks: If an upcoming business venture obtains a loan from a rather than getting funds from and capital investor in the starting phase, there are many benefits:

Investment capital assets are excessive, as investment capital investors anticipating

5-10

times more return on

their initial investment. Banks don’t desire any form of equity dilution, and the return rate of the bank is already fixed at 13-17%

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Banks are more comfortable to reach out to. Banks are readily accessible regardless of your location. It is easier to locate and reach out to your local banker and request funds than going out to meet your investment capitalist or angel investor.

Banks have a functioning organized system to use for handling funding requests. They have an established structure for financing assessment. By so doing, they tend to proffer solution to your funding request. The process is quicker when compared to that of an angel investor or investment capitalist.

The losses or benefits attached will be yours alone.

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Business Fund Quest

6

Bank Overdraft

Bank overdraft is a short-term outlet for money widely

patronized by many new companies and small enterprises alike. An overdraft is a loan opportunity. With overdraft, bank allows the business to owe it money even when the balance is lower than the zero or minimum marks. Though it has its condition attached too, the bank gets to charge a higher interest rate. As a result, an overdraft is a malleable funding source, though it only comes to the fore when needed. Bank overdraft is a fascinating funding source that helps a business stand in periods when cash circulation is unusually low or faces a short-term problem relating to cash flow. A practical example is a client not meeting up with their payment at the stipulated time or the company not being able to sell its products to the target markest as envisaged. The company might need money to sustain itself and advance production, necessitating it approaching a bank for an overdraft. Account overdraft occurs when a person’s bank account balance goes way below the zero balance mark, which leads to a minus balance in that particular account. It usually occurs when the bill is short on funds, and significant transactions are still carried out with that same account, which leads to the account holder incurring debt. External Sources

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The debt incurred is a result of the overdraft. The bank automatically lends a certain amount that would be enough to process a particular transaction in the holder’s account. This amount is expected to be returned with some potential add-on. Regardless of how relieving and useful the overdraft can be for the account holder, the expenses can reach beyond control if it is not adequately taken care of at the right time.

Types of Overdraft Bank Accounts. There are two types of bank account overdrafts: authorized and unauthorized overdrafts. Mainly we have two types of bank account overdraft, they are; Authorized bank overdraft z Unauthorized bank overdraft z

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Business Fund Quest

1. Authorized Bank Overdraft

Regarding assigned overdraft bank accounts, the deal has already been made known beforehand between the bank and the account holder. With both parties consenting to a particular borrowing limit. Which can easily be used on every acceptable payment platform. And as you would expect, the service fee varies for different banks. The expenses are being charged daily, weekly, monthly, and the agreed interest, often as high as

15-20%

annual

percentage rate. If you examine well, the charges for an overdraft agreement can be costly, especially if the amount borrowed is relatively small. For these reasons, account holders should be very meticulous when dealing with an overdraft and possibly avoid if possible, regardless of the type, authorized or not. Overdraft takes a large percentage of your profit. Therefore, it is not an encouraging funding source for small and medium businesses.

2. Unauthorized Bank Overdraft

You can decipher what it is from the name, it is an overdraft that has not been pre-agreed on, and the account holder has spent way beyond what they have as their account balance. So it means that unauthorized overdrafts can work regardless of a prior agreement or not, and the account holder can go past the stipulated overdraft sum. Unauthorized bank overdrafts result in higher charges, which makes them ever costly to a greater extent.

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Advantages of Overdraft Bank Account Overdraft bank accounts are not usually bad options. They also have attractive benefits, such as:

1. Good for Money Discrepancy

In situations where all the receivable dues arrive later than the payment date, overdrafts’ importance comes to the fore. For example, a business with just $3,000 in their bank account and four checks that sum up to $8,000 must be paid. In these kinds of scenarios, you can

effectively use an overdraft to settle the bill and balances. The money in the account will be returned as receivables are being paid.

2. It Shields You from the Embarrassment of Bouncing Checks.

Instability of checks usually causes harm to your credit standing. With a bank overdraft, statements can be prevented from bouncing.

3. Allows Timely Installments

Overdraft covers the shortage of funds, so you cannot have any form of late payment that stems from insufficient funds. It helps the account holder pay their suppliers in good time and no cause for late payment.

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Business Fund Quest

4. Saves Paper and Time

Compared with regular long term loans, bank account overdraft is usually easier to deal with, needing very little paperwork and not a long period to process.

5. Provides Relief

An overdraft can be done at any time, provided that the bank has not withdrawn the deal.

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7

NBFIs and Microfinance

Other financial institutions other than banks (Non-

bank

Financial

Institutions

NBFIs)

are

institutions

that officially do not have a banking license to provide effective banking services. Yet, these institutions provide some banking-related services. They are not permitted to take demand deposits, like the funds in checking or account savings from the public. Hence, it is not part of the state and federal financial regulators’ regular oversight. NBFIs erase a middle man’s place, allowing clients to have a straightforward disintermediation process, which encapsulates cost lowering and fees and rates. Examples of NBFIs are hedge funds, investment banks, insurance companies, private equity funds, mortgage lenders, and money market funds. NBFIs have played a significant part in satisfying the credit demands that traditional banks have not met. These institutions also give room for wealth management like managing portfolios of shares and stocks and discounting services (like discounting instruments and counsel on merger and acquisition exercise).

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Business Fund Quest

Types of NBFIs

I. Based on the Nature of Their Activities:

1. Loan company 2. Asset Finance Company 3. Mortgage Guarantee Company 4. Micro Finance Company 5. Infrastructure Finance Company 6. Core Investment Company 7. Investment Company II. Based on the Type of Deposits:

1.

Non-deposit accepting Non-Banking Financial Cor-

2.

Deposit-taking Non-Banking Financial Corpora-

porations

tions

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Advantages of NBFIs over Traditional Banks

z

NBFIs tend to be much more advantageous than traditional banks due to their lower cost. They help provide cheaper loans to customers.

z

Traditional banks are more concerned about the large business’s welfare, but NBFIs are more worried about small-scale borrowers’ interest.

z

Loan facilities provided by traditional banks are relatively slower compared to what NBFIs provide.

z

Traditional banks prioritize a customer’s credit score, making it difficult for customers with lower credit scores to access finance.

z

When customers obtain gold loans, the NBFI allows them the leverage of paying their interest throughout the loan and subsequently pay the principal at the end of the loan period.

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Business Fund Quest

Disadvantages of NBFIs

z

NBFCs cannot accept Demand Deposits: NBFCs belongs to the category of commercial banks, so they cannot accept demand deposits.

z

Lack of deposit insurance facilities: the depositor cannot help outside the insurance facility on the amount deposited with the NBFLs. And that is because these kinds of financial organizations are not incubated in Credit Guarantee Corporation and Deposit Insurance regulations.

z

Often time NBFLs have higher extra charges on late payment attached. NBFLs also have higher fees for processing. Loaning through NBFLs has increased over the years; contagion rates, interest rates, and credit risk vulnerabilities have also increased.

z

Don’t have the capacity to issue cheques drawn on itself: NBFLs are not included in the country’s settlement and payment system, thereby hindering them from giving the cheques drawn on itself.

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Microcredit is a banking system that offers small loans, especially to unemployed persons or those living in poverty who would not qualify for a standard bank loan. This kind of loan is often given to start a small business. Microloans range from as little as $100 to as much as $25,000. A few banks provide additional services like micro-insurance as well as checking and savings accounts. Some go as far as providing financial and business education. Just like conventional lenders, micro-financers charge interest on loans and even provide a repayment plan. Microfinance empowers people to safely take on small loans for their businesses coherently with the ethical lending pattern. Other enablers can generate a sustainable program that will help produce social profits via improved service delivery to the low-income population. Microfinance institutions give small loans and other resources to entrepreneurs and business owners to help them move their business in the right direction. Most of the receivers are in developing countries and cannot obtain a traditional loan. Micro-savings accounts are also under the canopy of microfinance. They give room for entrepreneurs to have a savings account without any specific minimum balance. Microinsurance provides customers with insurance at a relatively low rate and also with lesser premiums.

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Business Fund Quest

Advantages of Microfinance

z

Microfinance is more comfortable to accesstraditional banks rarely extend loans for those with relatively minimal or no assets. They usually don’t indulge in small loans. Small-sized loans are already classed with microfinancing. With microfinancing, small-sized loans are easily accessible.

z

Autonomy The entrepreneur could probably have a

perfect business plan but not the fund to start the business or initiate the business move. Microfinance in these kinds of situations provides enough funds for the venture to take off and generate income. The loan can be paid overtime off the profits gotten from the business.

z

Risk control Microfinance provides small business

with enough stable capital, which allows them to have financial security from unforeseen monetary related issues.

z

Women Empowerment Microcredit endows women

considering they are significant beneficiaries. Over the years, women did not have the opportunity to take part in economic activities. But in recent times, microfinance institutions now give women the platform by providing them with the capital they need to start their business projects.

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Disdvantages of Microfinance

z

Small size loans Microloans usually do little amount

they don’t involve in bigger size loans. They are made to help business owners in getting a short ignition in the right direction. They are not the ones to pull you out of costly situations like the regular banks can do.

z

Multiple and higher payments Even though micro-

loans deal with smaller amounts of money, money lenders usually try to get the money back as quickly as possible. That means you will have a shorter time frame to payback, and it implies that you will have to pay higher per the payment schedule.

z

Microcredits limitation Some microloans have

some rules as there are limits to what they can use the resulting funds to do. Microloans do not allow their customers to use the capital gained to pay off other loans or purchase real estate.

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Business Fund Quest

8

Business Incubators and Accelerator

Business Incubators are organizations pitched towards

hastening upcoming and companies’ growth and success in their early phase. Companies help new and upcoming companies to arise by giving services like office spaces and management training. Business brooding programs are often sponsored by private companies, domestic entities, or even public institutions such as universities and colleges. Business incubators are different from research and technology parks in their commitment to upcoming businesses and companies in their early stages. Incubating activities have not been limited to developed countries alone; Incubating environments are being applied in developing countries. This helps in bringing up interest for financial aids from organizations like UNIDO and the World Bank.

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Significant Dissimilarities between Business Incubators and Business Accelerators

z Most

times, they can be intertwined and

used in place of each other. Still, accelerators and incubators have different functions, so they serve different purposes; they produce different results and receive various upcoming businesses.

z Business incubators and business accelerators give counsel, guidance, and different forms of support for upcoming businesses. The main difference

between

them

is

that

business

accelerators, just like the name implies, constrict the time frame for starting up functioning as boot camp.

z Business

accelerators lay claim to helping

entrepreneurs make a wave in their business. Incubators

breed

the

companies

in

their

upcoming stage, giving it the room to grow at its stride.

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Business Fund Quest

Performance of Duties Provided by Business Incubators They offer networking activities. z They offer marketing assistance and aid market rez search.

Incubators offer accounting and financial managez ment aid.

They offer a link to crucial partners and also serve z as consultative boards and mentors.

They make it easy to access bank loans, angel inz

vestors, venture capital firms, guarantee programs, and loan funds.

They help in identifying the management team z and other forms of recruitment.

They offer other facilities like intellectual property z management and technology commercialization assistance.

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Types of Business Accelerators and Incubators

1. Virtual Business Incubators:

The virtual model gives room for a company to get advice from incubators without being located on the incubator site. This fresh model works better for those entrepreneurs who require counsel an incubator offers and want to maintain their workspace, warehouses, etc.

2. Public and Social Incubator:

These kinds of business incubators primarily for the public’s good. Social incubators focus mainly on providing social entrepreneurs with the items they need to broaden their business horizons.

3. Seed Accelerator:

This business incubator canters in the early stages of upcoming businesses. Seed accelerators are popularly known as startup accelerators. They have fixed-term and cohort-based plans that include educational components, mentorship and culminate in a public pitch event. Like the corporate accelerator, we have specific types of seed accelerators, often subsidiaries or platforms for larger corporations acting like seed accelerators.

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Business Fund Quest

4. Corporate Accelerator:

Corporate accelerator is a particular type of seed accelerator supported by a profit-oriented corporation. Just like the seed accelerators, they sponsor upcoming companies in their startup phase through mentorship and, most times, workspace and capital.

5. Startup Studio:

It’s a kind of business incubator with acting portfolio companies. A startup studio can also be called a startup factory, a venture builder, or a startup foundry. It’s a studiolike company that is designed to build several companies in succession.

6. Venture Builder:

This kind of accelerator is like the startup studio, but its function is to build companies internally. They are often called tech studios, venture production studios, or startup factories: organizations make companies using their template of ideas and resources.

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How to Decide which Business Incubator/Accelerator to Pick for Your Startup You should choose an incubator that provides a z

free or relatively cheap workspace that permits you to reduce overhead while you grow.

Get incubators who give your business the pathway z

to benefits that can assist in pushing your business in

the

right

direction,

including

workspace,

mentorship, expertise, influence, and sometimes capital. Do your findings and be sure that investors are z

confined in the incubator to invest in the proper startup and lead them to succeed. Being acquainted with the type of incubator will provide you with good benefits when you are sourcing for funds to use in growing your business.

Factors z

like location, the track record of the

incubator, and perks must also be considered.

An z

incubator’s

curriculum

and

structured

environment can help new businesses keep focus and grow in the right direction.

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Business Fund Quest

Advantages of Business Incubators

z

Shared Operating Costs: Those who rent spaces

in a business incubator have a wide range of overhead expenses in common. These include utilities, office equipment, computer services, laboratories, conference rooms, and receptionist services.

z

Consulting and Administrative Assistance: Mangers

of incubators and other staff have the chance to give insightful counsel and information on a broad array of business matters, from business enlargement financing to marketing.

z

Access to Capital: Most business incubators grant

entrepreneurs access to capital companies in their early stage need.

z

Legitimacy in the Community: Many entrepreneurs

testify that when their businesses were still very young and eventually admitted into the incubator plans, they enjoyed rewards like the aura of legitimacy and credibility among customers and vendors.

External Sources

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Disadvantages of Business Incubators

z

Most business incubators will require a time commitment of around one or two years. You may also need to get adapted to the schedule set by your business incubator, including different types of training, workshops, and many more.

z

Often time, the application process can be competitive and exhaustive. Many incubators require the applicant to submit a detailed business plan and disclose all business actions.

z

A new business venture or upcoming businesses will often need to part ways with their equity start to a startup accelerator or incubator.

z

Many business incubators will need a time of the dedication of about a year or two. Startup businesses may need to adapt to the schedule set by their business incubator, which includes different types of training, seminars, and lots more.

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9

Creating Partnership

A partnership is a formal alignment between two or

more parties to work together and operate a business and, and share the profits accordingly. A block can be any engagement undertaken collectively by multiple parties. These parties may be governmental, businesses, private individuals, or non-profit enterprises. The aim of a partnership can also vary. Partnership financing helps to bear innovative approaches. It encourages effectiveness, promotes collective solutions that bring about different purposes of partners and possible investors, and reduces cost. In a partnership or licensing agreement, financing might be restricted to an advance on a first-order to help scale up manufacturing. Mainly, the more significant win is the fact that the cost of setting up your supply chain and marketing plan is reduced; you won’t need to spend much. We have three main types of Partnerships, and they are: 1. General Partnerships:

General partnership involves all parties bearing all legal, financial, and liability equally. The individuals are rightly responsible for all debts taken by the association; benefits are also shared equally. The particulars of the benefitsharing will undoubtedly be made known in writing a partnership agreement.

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119

2. Limited Liability Partnerships:

Mainly, Limited liability partnerships are a regular structure for professionals like accountants, lawyers, and even architects, this agreement place restrictions on partners’ liability.

3. Limited Partnerships:

Limited

partnerships

are

a

product

of

general

partnerships and limited liability partnerships. A partner must be a general partner in the least, with full personal liability for the associations’ debts. At least one of the silent partners who have liability is limited to the amount invested. This silent partner usually does not take part in the management or daily operations of the company as their partnership role does not require them to be active in the scheme of thing.

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Business Fund Quest

Advantages of Forming a Partnership

z

In a business partner, you have a person or persons who can help handle all business tasks. Partners can share lessons between themselves, which will lead to jobs getting done faster, which means partners will do more than when they work alone.

z

Partners bring more to the table than you can ever imagine; they probably have more skills and knowledge in a particular aspect than you do. Your partners might have gained experiences from the past that can directly impact your business positively.

z

Starting a business alone can be expensive. You might have costly overhead expenses for inventory, retail space, equipment, etc. A partner can lift the financial burden off your shoulder. It will not require you to pay all sum alone; you will split the cost of production and every other incurred cost with your partner. And due to your partner’s financial contributions, you would be able to afford more things ahead. And also, you will be able to avoid large amounts in debt when starting your business.

External Sources

121

Disadvantages of Creating Partnerships

z

In a partnership, you don’t have the luxury of making decisions independently; you have to work with your partner to create a mutual decision on every matter.

z

You and your partners will have to disagree on specific issues, which sometimes lead to conflict.

z

When you are in partnership, you have to share all profits fair and square depending on the number of partners you have, but if you run the business all by yourself, you get to keep all earnings to yourself.

z

In partnership, you and your partners are treated as one, so if there’s a need for any legal action regarding the business, you would all be charged regardless of who the offender is; you can’t be treated separately.

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Things You must be Sure about before Creating a Partnership:

1. Would you prefer to do business alone, or going into business with others is preferable to you?

2. Is being liable not a problem for you? Because when you are in a partnership with anyone, the business is not separate from you all. Financially and legally, you’re liable for your business.

3. Your style and that of your business partner, does it lock well? You need a partner who understands you well, and you know them well too.

4. What kind of partnership do you want? As I mentioned

above, there are three types of partnerships. Understand and decide which kind of partnership situation suits you better.

External Sources

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10

Economic Development Organizations

An economic development organization (EDO) is an

organization that is committed to the development of the economy of a particular region, regardless of the region whether subnational areas such as towns, cities, countries, provinces, states, or a whole nation. An economic development organization (EDO) also focuses on global territories brought together via economic integration. EDOs

are

usually

government

organizations,

non-

governmental organizations ( NGOs), or public-private partnerships which are working in harmony with other stakeholders to improve the regional economy they point their fingers to, whether internal or external. Economic development organizations can charge invitingly lowinterest rates when loaning beside a bank. EDOs provide funds for startups, which helps in product development, marketing, sales, hiring, and many more. But sometimes, certain limitations may not be fully understood at first. These limitations can halt growth at an inconvenient time later on. Therefore, individuals are encouraged to understand what they are getting into before they go into a business partnership.

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Business Fund Quest

Primarily

economic

development

agencies

help

businesses regardless of scale (small or large) in four ways: Workforce statistics. z Market statistics. z Recommendations to companies with similarities z and other resources.

Real estate costing and availability; regulatory and z zoning related issues.

External Sources

125

11

Bartering

Bartering occurs when multiple parties, say nations,

individuals, and businesses, exchange goods or services evenly without any direct use of money. This means that the concerned parties exchange certain goods for other goods. Even though the Barter economy is regarded as more archaic than modern economies, barter transactions still regularly transpire in marketplaces. There are three examples of bartering, and they are discussed below, along with a stock contemporary barter exchange: 1. Bartering with Consumer Goods

Simply put, bartering exchanges a valuable good for another helpful between two individuals. Online bartering exchange became immensely popular with small scale businesses after the financial crisis in 2008, which climaxed

in the great recession. As expectations and sales diminished, small businesses effectively turned to barter exchange to generate income. 2. Bartering with Consumer Services

Bartering also takes place as an exchange of services. Services can also be marketable acts, services like legal representation, and performing mechanical works where necessary.

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Business Fund Quest

3. Modern Advertising Services

The most usual business bartering in recent economies involves selling advertising rights. An upcoming

enterprise

makes

purchase

exchange

with its products more accessible and faster than its organization profit, which can preserve valued running

cash.

accommodate

Hence, new

the

transaction

business

and

helps

increase

to the

organizational cash flow. A merchant can buy goods and services by exchanging dollars, and they also use the free-interest credit line.

An entrepreneur should have an exclusive advantage of buying goods on the advertising platform of barter exchange. This will further attract customers who can pay for the service the organization offers. It is also essential that the entrepreneur know that joining the barter exchange platform has an instant and crucial effect on making a new trading medium. If part of a business is a private economy using a patent batter currency. However, some firms who find it challenging to buy and sell to themselves now motivate each other to transact business with fellow exchangers by creating a new trade medium.

External Sources

127

The perfect way to get involved in barter exchange is to subscribe to a viable barter exchange platform. It involves various businesses that search for appropriate barter partners. They specifically work in two (2) basic ways,

1.

which are:



2.

Organizations can exchange their products with new businesses in the medium of barter exchange. The product can also be primarily used to purchase products from new affiliated member enterprises.

Organizations search for new businesses with the same

128

value system, and they bargain directly with product exchange.

Business Fund Quest

Professionals

suggest

the

following

tips

to

organizations or persons who want to involve in Barter as a form of exchange to have the maximum gain. ● You must train your dealers to use Barter in such a way that it will benefit your enterprise. If possible, always try to use Barter for striking deals with your merchant. ● An upcoming business must think about the barter form of exchange before buying equipment for the organization. The organization’s income stability is vital before purchasing a phone system, furniture, and even before paying for a marketing advert. You must ensure the company has a cash-flow of income. ● There are opportunities for those who do barter exchange as they can buy and sell cash. A photographer may buy a full-frame Canon camera and flash on trade and direct the cost of cash-paying. ● One of Barter’s uses is that it helps to trade unused and unsold inventory at full prices. Creating a new exchange medium for the enterprise’s barter group is essential, which allows buying your products at top prices. Thus provide expertise to enjoy and manage their recess time.

External Sources

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The Advantages of Bartering

z

Flexibility: Barter exchange an opportunity to

trade goods for another and permit the sale of two different products. However, part of barter’s flexibility is that you can also exchange services; that is, it doesn’t need to be just products or items traded for other things. You can exchange services like cleaning, fixing, repairing services for product items, or use it to seek additional help.

z

Low budget: Barter helps the upcoming business cope because it needs little or no money to start trading except for some exceptional goods you need to pay for as an organization like taxes, utility bills, et cetera.

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Business Fund Quest

The Disadvantages of using Barter

z

You will run lost doing exchange if you don’t have the acquired skill set needed to run it. You may place value on products you want to exchange and degrade your products; the organization will surely suffer for it.

z

Confusion might arise when transacting highvalue swaps due to the effect of tax on the organization.

z

Problems may arise from other parties. It is possible they aren’t registered and there is no legal backup, and no warranty or legal team to back your enterprise for the barter exchange between the two parties.

External Sources

131

Summary Money can be obtained from external and internal sources. Some money originates dependently outside the business. Such money is often the fountain of finance that keeps the organization going; such cash is called the “external money,” which is the business’s money but was not a sourced company. Thus such money keeps the enterprise transaction instant. For example, outsourced loans, either from banks or from an investment scheme, form an external fund source. An external source of money can either be a “Long Or Short Term Source,” that is, you can source for funds in any way above, depending on the contract. You can source money for your enterprise without any of the following channel, which are: Preferred stock z Venture capital z Trade credit z Term advances z Equity capital z Bank overdraft z Factoring z Leasing z Debentures, etc. z

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Funds organized outside the enterprise can’t be compared to internally raised funds which are gathered from the enterprise income and profits. Using external source funds helps the enterprise navigate a vast area in business financial affairs and its plan. However, Barter enables you to increase your savings, and the required capitals for the enterprise needs are present since there are various sources of funds outside the business.

External Sources

133

Chapter Four

Equity Financing

What is Equity Financing? This is an act of raising money for the enterprise by trading the organization shares or products to meet its immediate needs. The organization’s needs can be short-term needs like paying utility bills, fueling of engines, and other necessary things. It can also include a long-term condition that requires the company to invest in the organization growth, staff training, and purchase of a new franchise, or renovation of the company offices. You must understand that equity financing is different from debt financing. With the latter, you will have to pay the lender the amount of money you borrowed from him/ her or a company, which may be a bank or any other investment company. Still, with equity financing, you don’t need a refund. Hence, the investor shares your company in exchange for the fund invested, a legal agreement deal between both parties.

Equity Financing

135

The organization can found various groups/sets of stock to regulate the shareholders voting rights. For instance, the organization may have a joint stakeholder who is allowed to vote. However, preferred stockholders can’t vote, but they generally receive fixed profit before the common stockholders.

Types of Equity Financing

1

Life Insurance Policies

Various life insurance schemes have their common

characteristics that allow you to hire against the system’s expected fund. Term insurance is an exception for things like this because term insurance has no fund worth. It takes two to three years to access the money because enough cash will have accumulated and ready for borrowing by then. Such currency may be used to execute a business project. However, the loan decreases the policy’s worth, and when death sets-in, there is a need for a refund before the beneficiaries of the system withdraw any payment.

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Business Fund Quest

Types of Life Insurance Policies

1. Permanent Life Insurance:

This is insurance in which the policies as no closure date/time. Hence, its policies are tax-friendly. As long as the system runs, the policyholder pays no taxes on incomes, and the advancement of the cash worth is a relatively taxdelayed basis.

2. The Whole Life Insurance Supplies Channel for the Assured Life:

Thus, part of the advantage of funding death savings is that the worth of money increases as it accumulates continually. However, the policyholder can borrow or withdraw money from the savings account when he/she is still alive.

Equity Financing

137

2

Friends and Family

This type of financing means close and trusted friends

and family relatives help raise funds for the initial organization investment. This type of investment cannot be said to be the only form of investment because it is limited; most time, it cannot fund the organization. However, it is the surest, fastest and common means of gathering find for upcoming businesses. You must know that family and friends financing is different from debt financing or loan claim from banks, family and friends, or other investment schemes.

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Business Fund Quest

Essential Tips Needed when Approaching Family and Friends

1. There should be a well written formal agreement. 2. You should be sure no investor will have any form of financial liabilities for the business.

3. You should be sure of when you will be able to return the money.

4. T he duration of the business should be known. 5. There should be clarity about your expectation. 6. There should be an agreed mode and time of payment. 7. It would be best if you think twice before approaching your confidant - think of other sources.

8. You should be sure of the share or profit that will be allocated for investors.

Equity Financing

139

Advantages of Financing from Friends and Family

z z

They can lend you money with less or no interest rate. The payment method may be flexible compared to banks.

z

They may loan without collateral since they know you.

z

You will be placed on favorable terms and conditions compared to other schemes or policies. A little detailed business plan will be needed.

Disadvantages of Financing from Friends and Family

z

The disagreement between the deal can destroy relationships.

z

The time frame (when they are ready to collect their money) may not be conducive to your business.

z

They may wish to poke nose into your business, which is not proper.

z

140

The business deal may be tedious.

Business Fund Quest

3

Equity Offerings

This is also known as the “Security Offering.” It is the

sales of surveillance by an organization. Mostly it is use remark an Initial Public Offering (IPO), meaning that if an organization stock or shares are accessible by the public for purchase and it may be used for bond issues. Regardless of the kind of security offering it is, it merely stands for a Singular Investment Round. Organizations most time make a public offer for their stocks to raise funds that influence the organization’s growth positively. Organizations sometimes offer supplies to have enough money to care for and sort all bills in the company.

Equity Financing

141

Types of Offerings

1. Initial Public Offering (IPO):

It offers private companies shares to the public when new stock emerges. The emergence of public claims gives room for the organization to gather funds from public investors. The evolutionary change from public to private investors is essential for private investors to maximize their profits on the Return on Investment (ROI). It involves a premium share for private investors.

Although, public investors are also allowed partake in the offering. When an organization is capable of handling the stress of SEC policies, including the quota of the public shareholders, steps to an IPO include the following:

1. The organization and the sponsor meet to decide what the terms and a concrete written document will be signed.

2. There should be a board of trustees. 142

Business Fund Quest

3. Those who form the IPO team are the sponsors, accountants, attorneys, and SEC professionals.

4. For

just arrived stocks, marketing strategies are invented. New stores’ emergence gives an understanding of demands and provides the organization with the perfect offering price. Hence, in making such decisions, the organization needs to consider the public interest.

5. It must be a topmost priority that the organization’s

financial statements are submitted for auditing every quarter of the year.

6. Some investors and sponsors have the privilege to purchase shares after the designated day.

7. As

sponsors present their proposals, they further determine the offering price, share price, and market price.

8. There must be a well-documented balance sheet for the organization.

Equity Financing

143

4

Sweat Equity

Sweat equity is described as the process of support for

an enterprise by a group of persons or individuals. The support isn’t always money, and sometimes it can come in a sort of time, advice, mental assistance, physical labor, etc. Thus, it is useful for the growth and expansion of the organization. This type of equity is shared among the construction companies, real estate. It is placed in high regard for upcoming business owners. The word implies “SWEAT EQUITY” – assistance from someone’s sweat (the salty fluid secreted through the skin pores) that shows that it requires some effort from the person or organization, rendering the help. The real estate capitalist may also use sweat equity when doing property repair, which should be done before leasing or selling the building. Sweat equity is beneficial to the organization that collaborates. They come together to contribute their quota through hard work to help the organization. Upcoming businesses value sweat equity as it helps them to stabilize their finance. Most employees for any startup company will be underpaid because of his/ her service. Hence, part of their sweat will contribute to the growth of the company. Some collaboration includes persons with money and others who can spend their time and use their energy. The partnership consists of fund and non-fund.

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Business Fund Quest

Important Factors to be Considered in Sweat Equity Sweat equity helps to study the financial status of z the enterprise.

It is essential for the upcoming business with little z capital.

You must calculate in term of long term worth. z Sweat equity should be valued carefully so as not to z devalue effort.

How to Determine the Value of a Sweat Equity Entrepreneurs must know the worth of the business. z

They are applied in calculating the amount injected to the company for a start (capital) and help equate other enterprises.

It is highly recommendable to know the worth of z every share per percentage interest.

You need to be sure that the amount allocated z

to sweat equity is perfect compared to other organizations.

You can calculate the sweat equity by finding out z what other companies pay for their organization’s work. Equity Financing

145

Advantages of Sweat Equity

z

Create inventively: an additional payment is given to

employees because of the increasing output, which directly increases its value. Another remuneration is given to the employee to motivate them to do more.

z

Saves money: with the help of sweat equity, young

entrepreneurs, and startup business confidently start their interaction with the little capital. There will be lower expenses with sweat equity, which will give room for more profit and faster growth.

z

Attracts talent and skills: giving out shareholders’

ownership interest in a corporation may attract worthy employees and can make you unable to pay these employees’ salaries.

Disadvatages of Sweat Equity

z

Difficult to value: It will be hard to agree on the

worth of sweat equity.

z

It can lead to conflict: the unknown about sweat

equity can lead to conflict within the enterprise.

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Business Fund Quest

5

Warrants

A warrant is a well known derivative instrument which

generally gives the warrant-holder a right to purchase and own underlying stock at a certain predetermined strike price. A warrant-holder can offer to buy the issuing company’s supply at an attractive price at a later date. It is a discount to the company’s stock; the companies issue these along with a debit or preferred stock issue. It makes the yield attractive for potential debt investors.

A warrant has an inherent conversion ratio fixed at the time of the problem.

The conversion ratio is total shares issued to the warrant-holder when he exercises the warrant. An American warrant can be used at any moment on or before the expiration date, while European warrants can only be used on the expiration date. Guarantees that give the right to buy a security are known as call warrants; those that provide the right to sell a security are known as put warrants.

Equity Financing

147

Types of Warrants

1. Detachable Warrant:

A detachable warrant may be separated from the debt or preferred stock tools along with which it was issued. It can be sold solely from the obligation or select stock tool.

2. Wedded Warrant:

A wedded warrant can’t be separated from the debt or preferred stock tools. A warrant holder has to surrender the agency that joined them, too, if he has to use the warrant.

3. Naked Warrant:

The organization issues a naked warrant without giving a debt or preferred equity tool in conjugation.

1. Covered Warrant:

Normal warrant tool is weakened because new shares are issued upon exercise. A covered warrant is usually given by a financial organization that already owns the underlying claims. Hence, it is not wasted as there are no new shares that need to be issued upon exercise.

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Business Fund Quest

Advantages of Warrants

z

High Transparency: The accomplishment of a

warrant can be traced by observing the underlying securities’ movement.

z

Beneficial to Speculators and Hedgers: Warrants are

favorable to the speculators and hedgers who keep a keen watch on the market accomplishment to profit from the bull or bear market.

z

Low cost: The warrants are generally priced more

efficiently than the shares to make it eligible for small capitalists. These prices are decided with the help of the change ratio.

z

High Returns: The warrants’ gain is relatively

high since these are mostly done with the channel or long-term investing perspective. Also, organizations usually earn high profits in the long term, making the warrants to be highly producte.

z

Transferable: The warrants are easily movable,

using the transfer of possession. No registration formalities are needed for this.

Equity Financing

149

Disadvantages of Warrants

z

High risk: The outcome of a warrant depends on

the stock it is aligned to, and this is ultimately volatile to the market fluctuations, so contracts are considered high-risk tools.

z

Fall to Zero Value: The warrants’ value may even

become null, causing the full investment value to be lost.

z

High Loss Possibilities: This is altogether based on

the stock market; the holder can either earn a substantial profit or get a significant loss.

z

Limited control on the organization: The warrant

holders do not have the same rights as the shareholders have. For example, they cannot participate in the annual general meetings of the issuing organizations.

z

Warrant lapses when it is not redeemed on or befor the expiration date: Warrant becomes obsolete

if the holder does not redeem it on or before its expiry date.

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Business Fund Quest

Summary Equity financing is a mode of gathering money for an organization to meet the required liquidity needs by trading its share for cash. The stake solely depends on the promoter’s possession in the organization. Equity consists of a lasting investment in an organization and no refund by the organization. The investment should be formally documented as a business entity. An equity stake in an organization may be in membership units, as in a limited liability organization or the standard or preferred stock in a corporation.

Equity Financing

151

Chapter Five

Debt Financing

What is Debt Financing? Debt financing is a process of trading debt tools to the capitalist. It happens when an organization gathers funds for capital (both working capital and capital expenditure). However, the interest on the debt must be paid to the creditor (the capitalist). When an organization is broken and needs money, they obtain financing through debt, equity, and the two’s hybrid. The process of trading bills, notes, bonds to capitalize on deriving the money needed to start and develop a business is called debt financing. We have capitalist that buy bonds from organization anytime it been issued; they are called the lender. They are either retail or cooperate capitalists. The principal (that is, an investment’s price/value) should be paid as agreed between the two parties involved. Should an organization go bankrupt, there is every tendency for the lenders to help eliminate debts than shareholders. There is an allocated time for the borrower to refund the loan with interest. The payment may be monthly, quarterly, half of the year, or yearly, depending on the borrower’s agreement. One of the essential characteristics of debt financing is that there is always collateral used to secure the loan. Hence, it is also vital you connect loans for a better line of credit. Debt Financing

153

Types of Debt Financing

1

Commercial Finance Companies

A Commercial Finance Company is a non-bank

organization that lends out money to small businesses with a possibly high-interest rate compared with other banks. They are also known as private business lenders. However, some of the commercial finance organizations can’t be altogether called lenders. They also provide an arranged business financing to businesses that are not even capable of traditional bank loans. Commercial financing organizations give out loans to organizations with collateral. Thus, startups sometimes don’t have a chance to borrow from the commercial finance

institute

because

the

lenders’

collateral

is

sophisticated equipment, organization inventory, etc. Therefore, organizations in construction, manufacturing, or wholesale enterprise will be highly attended because of the collateral used to secure the loan. They provide working capital for organizations, no startup capital. They also help enterprises work hard to meet their target, with no respect for company size because they have risk enough for the company to run loss.

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Business Fund Quest

Commercial Finance Options

1. Medium-term Commercial Finance:

- Bridging finance Business loans - Crowdfunding 2. Short-term Commercial Finance:

- Business credit cards - Trade credit 3. Long-term Commercial Finance:

- Commercial mortgages - Overdrafts - Invoice discounting - Invoice factoring - Asset-based lending

Debt Financing

155

Advantages of a Commercial Finance Company

z

They open and ready to take on a riskier loan

z

They lend money for startups and small and medium enterprise (SME)

z

They operate a flexible lending condition

z

They do short and long-term loans for small and large organizations.

Disadvantages of Commercial Finance Companies

z

They require sophisticated collateral like the organization inventory, tools, etc.

z

Their interest rate is higher compared to other banks because they take more risk.

z

156

It needs a strict review of its terms and conditions.

Business Fund Quest

2

Bonds

One of the ways organizations raise money is through

“Bonds Issuing”. It is an agreement that happened between

two parties – the organization and the capitalist. Thus, the capitalist borrows out some amount of money to the organization for the organization’s growth. However, the capitalist is entitled to a certain percentage of the money from the enterprise income, which will be paid to the capitalist as agreed with the time frame (monthly/quarter/ yearly). There are characteristic differences between bond issuing and other fundraising platforms. The following are the differences: It is easy to keep records because bond-holders get z the same deal.

Bonds issuing is more flexible compared to other z forms of fundraising.

Bonds issuing helps to accommodate more lenders z for the organization in a more effective way.

The same interest rate and maturity date are given z to all bond-holders.

Debt Financing

157

Types of Bonds

1. Callable Bond:

This type of bond allows the issuer to have access to the money even before the designated day (that is, the cash can be redeemed before the mature day). It is also called the “Redeemable Bond”, simply because you can save your money before the assigned date. This will help organizations to attend and pay their debt faster and easier.

2. Collateralized Debt Obligation (CDO):

CDO is complicated in structure. It has various loan streams, which is then sold out to capitalists. It’s a particular type of bond because its worth is derived from other assets.

3. Convertible Bonds:

Companies issue that it may be converted to shares of the issuing organization’s stock from the bond-holders perspective. Convertible bonds yield better than common stock, but it has a lower income than corporate bonds. Types of convertible bonds are:

● Mandatory Convertible Bond (MCB) ● Vanilla Convertible Bond (VCB)

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Business Fund Quest

Advantages of Bonds

z

There is no reduction in bond-holders’ worth.

z

It gives a more flexible way to raise debt capital.

z

It helps to retain money in business.

Disadvantages of Bonds

z

Bond-holder – since it is a long-term deal, the capitalist imposes some formal agreement on the business to reduce the business risk.

z

The bond-holders will always receive their interest regardless maybe you make a profit or incur a loss.

z

Meeting with the capitalist may be complicated than banks that wish to form more close mutual relations with their clients.

z

Your business’ worth drops in respect to your profit because bond interest payments take priority over incentives.

Debt Financing

159

3

Mezzanine Financing

Mezzanine financial is a crossbreed of debt financing

and equity financing. The crossbreeding properties help the lender switch to an equity interest in loss due even after other influential lender had paid. They already have strategized tools which are known as warrants. It raises the worth of assisted debt, and it gives room for easy access to bond-holder. They are mostly linked with skills; it can set priority standards to choose a new owner above the existing owner in bankruptcy. The organization’s growth and development run to mezzanine financing from financial assistance and skills acquisitions, a small-medium deal. Most times, the loans are from long-term capitalist and existing lenders. Thus, mezzanine finance can also have an amount of allowable deduction (tax-deductible interest).

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Business Fund Quest

Characteristics of Mezzanine Loans There are always doubtful financial debts. z Mezzanine loans have higher profits compared to z average debt.

Installment payment is not allowed. z They are assistance to senior debt. It has been z prioritized by the borrower common stock.

Variable interest on the borrowed money may be z integrated.

Debt Financing

161

Mezzanine Financing can be Requested:

1. 2. 3. 4. 5.







162

For the payment of stockholders’ financial dividend (income distributed amidst the stockholders);

When purchasing new shares or collaborating with business;

To fund the growth of the organization;



For recent financial acquirement;



To support the new management take over.

Business Fund Quest

Advantages of Mezzanine Financing

z

Mezzanine financing is further controlled by present stockholders (that is no need of changing

z z z

the ownership). They aren’t collateral centered because there is a massive flow of income. Raising equity from capitalists is costly compared to pricing equity. The borrower can further re-invest money into the enterprise because of no instant principal

z z

payment. A mezzanine is a long-term financial plan. It does not require a change in ownership or control – existing owners and shareholders remain in power.

Disadvantages of Mezzanine Financing

z z z

Mezzanine loans are more costly than the bank loan. It is relatively risky. They love to intrude into the businesses of those which they lend funds. This gives them the privilege to increase borrower returns.

Debt Financing

163

4

Alternate Peer to Peer (P2P) Lenders

This is a type of financing that renders a helping

hand towards cooperate and non-cooperate businesses. However, with alternative finance, you do not need long track records, collateral, etc. Hence, individuals and organizations find it easier to fund their business from alternative finance lenders than other traditional banks because of their formality. But it is also important we know that they lend out money with a very high-interest rate. There

are

various

alternative

lending;

invoice

financing, crowdfunding, and peer to peer loans. Alternate finance is faster, easier and, flexible. It also has a very high tendency that your loan will be approved compared to other commercial financing organizations. In the modern age of FINTECH, traditional banks can keep up with global demands. Alternative lenders are everywhere, ready to lend out their money to help grow organizations that are prepared to accept their terms and conditions. The peer to peer lending scheme has an online z

platform where they connect enterprise (the borrower) with the capitalist (lender). On the peer-to-peer platform, man’s needs are met by

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providing solutions to both parties’ problems – the borrower source for money for the growth of their businesses and the lender, too, acquires more funds through the exciting place on the borrowed money. The platform allows the borrower to choose the best from the varieties of options present. The peer to peer platform is automated. That is, it matches the borrower to the lender. Both borrower and lender don’t need to know each other. A pristine computer algorithm has been put in place to monitor the system.

Debt Financing

165

Things that Should be Considered when Opting for a P2P Lending Platform:

Verification should be done to confirm and have clarity about maybe the lender will attach penalties.

The

organization

should

verify

whether the lender will be additional charges added to the loan.

The borrower must be qualified before requesting a loan.

When you are in haste to borrow money due to some form of exigencies, you need to note when they (the lender) expense funds.

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Peer-to-peer lending has been in practice since

2005.

Currently, the troop of competing sites for this service is immense. Although all operate the same way, they differ quite in some major aspects, especially with their target customers.

What is Peer-to-Peer Lending? Peer-to-peer (P2P) lending can also be called social

lending or crowdlending. It is a debt financing method

where individuals can borrow and lend money without using an official financial institution as an intermediary. They are loans made by individuals and investors. They are particular set of people with extra money who offers to lend their money to folks (individuals and businesses) who require cash. Peer-to-peer often involves more time, effort, and risk than the general lending scenarios.

Debt Financing

167

Advantages of Peer-to-Peer Lending

z

Higher returns to the Investors: Peer-to-peer lending

generally provides higher returns to the investors than other investments.

z

Lower interest rates: Peer-to-peer loans often come

with lower interest rates because of the greater competition between lenders.

z

More

accessible

funding sources:

peer-to-peer

lending is a more affordable financing source than conventional loans from financial institutions for some borrowers. This may be due to the low credit rating of the borrower.

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Disadvantages of Peer-to-Peer Lending

z

Credit risk: Peer-to-peer loans are prone to high

credit risks. Many borrowers who go for peer-topeer loans pose low credit ratings that disallow them from obtaining a conventional loan from a bank.

z

Legislation: Some legislations do not condone

peer-to-peer lending or need the companies that give such services to comply with the investment regulations. This disallows some borrowers or lenders from accessing peer-to-peer lending.

z

No insurance/government protection:

Insurance

or any other related form of security net is not provided by the government to the people involved. Lenders are not protected in any way by the government.

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169

5

Bridge Funding

Bridge funding can also be called bridge financing. It is

a form of financing used by companies and other entities to congeal their short-term position until a long-term funding option can be arranged. Bridge funding usually comes from an investment bank or venture capital firm in a loan or equity investment. Bridge funding is also used for initial public offerings (IPO) or may include an equityfor-capital exchange instead of a loan.

This type of financing is used to fulfill a company’s shortterm working capital needs.

The name, bridge funding, came from the loan, acting as a bridge between funding options. This permits a business owner to stay afloat financially while working to secure an unlike, more lasting form of funding. These funding methods bridge the time frame when the business is experiencing a cash crisis, and the company is working towards getting capital from long-term funding options.

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Types of Bridge Funding

1. Debt Bridge Funding:

One of the options with bridge funding is that a company can take out a short-term, high-interest loan, known as a bridge loan. However, companies who seek bridge funding through a bridge loan need to be careful and understand the funding options. This is because the interest rates are sometimes so high that it can cause other financial struggles.

2. IPO Bridge Funding:

In investment banking terms, bridge funding is a financing method used by companies before their IPO. So, IPO type of bridge funding is designed to cover expenses associated with the IPO (Initial Public Offering) and is typically short term in nature.

3. Equity Bridge Funding:

This form of bridge funding is used when companies do not want to incur high-interest debts. They seek out equity bridge funding where a bridge funding is provided through investors and equity granted over the business. However, this route needs to be considered to avoid giving the investors total control of your business.

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171

Advantages of Bridge Funding

z

The submission, processing, approval, and funding process for bridge loans are typically much faster than bank-issued loans.

z

Bridge funding can cover upfront expenses while waiting for payment and not just business purposes alone in as much there’s collateral that is almost worth the fund.

z

A short-term funding solution could be the form of the financial help needed to maintain as much control of your business as possible when urgent.

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Disadvantages of Bridge Funding

z

The terms of bridge loans are always short for the return of funds. It generally ranges from

3

to

18

months. Due to this, larger monthly payments can be made for other business financing products.

z

It could lead to a significant debt compared to income ratios if mismanaged or lead to a vast, unexpected expense.

z

There are higher interest rates when compared to traditional loans or bank-issued loans. While you do not pay as much interest for conventional loans, you’ll likely pay interest at a higher rate for a bridge loan.

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173

6

Line of Credit (LOC)

A credit line is harmonization between a financial

institution-usually a bank-and, the client where the loan amount customers can borrow is established. A stipulated borrowing limit is given to a borrower where the borrower can take money out as needed until the boundary is reached. As money is being repaid by the borrower, it can also be quickly borrowed again. The borrower has access to funds from the line of credit at any time. As long as the borrower keep within the maximum amount (or credit limit) set in the agreement, the borrower can keep borrowing after making a repayment. In addition, the borrower must meet any other requirements, such as maintaining credit worthiness, ensuring timely minimum (re)payments and others. It is controlled by the amount of interest, size of fees, and different lender rules. Some credit lines allow you to write checks (drafts) while others include a type of credit or debit card. Businesses can finance short-term working capital requirements, by using a line of credit such as: Bridging a seasonal cash-flow gap. z Repairing business-critical equipment. z Financing a market campaign. z

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Types of Business LOCs:

1. Secured Business Line of Credit

This type of LOC demands businesses pledge specific assets as collateral to secure the line. Based on this LOC type being a short-term liability, lenders ask for short-term assets, such as accounts receivable and inventory. Capital assets, like real property or equipment, are not often required. Suppose the borrower cannot repay the line. In that case, the lender will assume collateral ownership and discharge it to pay off the balance.

2. Unsecured Business Line of Credit

This credit line does not demand specified assets as collateral; however, a personal guarantee will likely be needed. Because there is no specific collateral associated with this type of credit line, the business will most likely need a more robust credit profile and a positive business track record to qualify for this type of loan. For this, interest rates may be slightly higher.

3. Revocable Line of Credit

It is kind of credit source that is given to a business or an individual. This is usually given by a financial institution or bank. One major factor of this line of credit is that it can be rescinded at the lender’s will/decision or under specific circumstances. Debt Financing

175

4. Securities-Backed Line of Credit (SBLOC)

This is a form of credit line where loans are secured by using the borrower’s securities (investment account) as collateral. Typically, an SBLOC allows the borrower to borrow anywhere from 50% to 95% of the assets’ value in their account. 5. Home Equity Line of Credit (HELOC)

Most credit lines are unsecured loans. The borrower does not make available to the lender any form of collateral to support the LOC. However, there’s an exception with the home equity line of credit (HELOC) secured by the equity in the borrower’s home. The amount owed from borrowing must be less than the value of the borrower’s home’s equity. For the lender, secured lines of credit are attractive because they offer a way to retrieve the borrowed funds when the money is not repaid accordingly. Advantages of Line of Credit

z z z

Scalable to help manage cash flow, unique opportunities, and seasonal needs. They are made to give the essential capital for working. They also have the flexibility to pay expenses and cover other general purposes.

z

Lenders begin to judge credit decisions based on the company’s financial strength, not just the owner.

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Disadvantages of Lines of Credit

z

Fees and extra charges: Ensure your interest

rate is quite low. While you have to pay higher interest rates on credit cards, LOCs can result in a mountain of fees from maintenance and withdrawals. So, ensure any added fees are justified.

z

Debt Acquirement: This sometimes led to incurring

debt if there’s a slowdown in business, and the cash granted has been spent with no means to repay. As lovely as it is to have a line of credit on hand for emergencies, it is sometimes advisable that businesses take a standard loan. This is to avoid the temptation of access to immediate cash, in some cases.

z

Application hitches: Line of credit determines that

sometimes your bank requires that your business is two years old. Unlike with a credit card, where you are asked to provide extensive financial reports, including tax returns, cash flow statements, and other necessary information.

Debt Financing

177

Summary Debt financing occurs when a company borrows money for working capital or capital expenditures by selling debt instruments to individuals and institutional investors. The individuals or institutions become creditors. They are assured that the principal and interest on the debt will be repaid in return for lending the money. Debt financing occurs when a firm sells constant income products, such as bonds, bills, or notes, to investors to get the capital essential for its operations’ growth expansion. When a company gives a bond, the investors (lenders) purchase the bond. They are either retail or institutional investors that provide the company with debt financing. This is done to help borrowers improve their business. Debt financing is a time-bound activity where the borrower pays back at an agreed date and interest; payments could be made monthly, half-yearly, or towards the end of the loan tenure. It could be secured or unsecured. They are secured when the loan is taken with the company’s assets as collateral and unsecured when the credit line is used.

Types of Debt Financing are Commercial Finance Companies, Bonds, Mezzanine Financing, Peer-to-peer (P2P) Lending, Bridge Financing, Line of Credit.

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Chapter Six

Startup Competitions

What is Startup Competitions? Startup competitions are also good opportunities for raising funds that are available for startups. All participants partake by submitting their business plans or present a working sample of their products. The most outstanding projects or business plans get advanced up until the competition’s penultimate stage, where a winner is selected. The idea or business plan must be presented in an engaging pitch in an understandable manner that sells the idea to anyone worth the investment. By definition, startup competitions reward the perceptively best idea or business plan pitched by individuals or teams. The reward may be in cash or kind (certain amount of money or appliances, tools, and equipment). These serve as compensation for the ultimate winners based on their category.

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Things to Consider while Planning for a Startup Competition

Stick with competitions most directly relevant to your industry, niche or focus.

Startup competition organizers attract established entrepreneurs who are willing to help develop entrepreneurs that are coming up.

Finding a nearby startup competition, no matter how small, to reduce the expense of transportation. Competitions held at a far distance from the entrepreneur’s locales tend to incur more considerable expenses. Chapter Six

181

Aiming to partake in more massive startup competitions that have a broader reach to successful entrepreneurs can get tedious, unlike securing a place in a local competition. Even though the reward might be high, the chance of winning it makes it a gamble.

Go all in at the start to show your team’s credibility, and it may prove convincing to the judges about the integrity of the solutions that your business is bringing to the market. Do well to show that it will yield high returns.

Perfect your pitch by including all the necessary ingredients but do not be excessive and thus damage your chances.

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Advantages of Participating in Startup Competitions

z

Startup competition participants stand to take home sensible money – if they win or place in the competition.

z

It creates an opportunity to network and gain experience.

z

It gives opportunities to broaden your talent pool. You get to meet other talented people in your field and hence interact and network with them. The media attention that follows most of these competitions can help bring your company into the limelight.

z

The competitions offer a rare opportunity to market your product or service to interested parties without paying a single marketing fee. Proof of concept is all you need.

Chapter Six

183

Disadvantages of Participating in Startup Competitions

z

Competitions demand participants’ time and attention for weeks or even months. The company needs to have the time to devote to a month-long startup competition or miss out on potentially game-changing opportunities.

z

Traveling cost, rent and other expenses which will be incurred by entrepreneurs when they travel to meet sponsors and financiers, can make a participantincur more expenses.

z

The startup community is well (and kindly) tolerant of failure, but it’s capacity to ignore ill-conceived ideas isn’t unlimited. It is required to be prepared for the prospect of a genuinely tragic showing.

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Startup Competitions Around the World

1

AngelPad

It is a seed-stage accelerator program based in NYC and

2010, they have launched more than Every six months, they select about 15

San Francisco. Since

150

companies.

teams from a massive pool of applicants (usually around

2000) to work with.

2

TechCrunch Disrupt

TechCrunch Disrupt is a renowned startup competition

that attracts many participants all over the U.S. Typically, it is held twice a year in the U.S. and at different times across Europe and Asia. It has a massive following of participants worldwide.

Chapter Six

185

3

Web Summit (Dublin)

The Summit hosts about

200

startups competing for

a prize to a panel of experts who act as judges. The goal of the summit is to discover the innovative ideas that startups have to develop. It is a chance to showcase the most innovative ideas and products to the world.

4

7VPS, SevenVentures Pitch Day (London, Berlin)

The company holds multiple pitch days throughout

the year, each one held at a different event and focused on another sector or field. The competition opens the door to the rare opportunities that will help startups to reach a broader audience across Europe through the publicity that the company provides. This means that this competition exposes small-medium businesses to larger customers across the world.

5

LeWeb (Paris)

One of the most popular and largest web and tech

conferences globally, LeWeb brings startups, tech insiders, investors, and media together, all under one roof.

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Business Fund Quest

6

Global Meetup 2021

This is a kind of business retreat for up-and-coming

small and medium enterprises – it is designed for the best startups. Global Meetup allows startups to come together, pull head together in a very unconventional environment and rub minds to produce great ideas. By that, they can make business deals with corporate individuals and investors, meet different people, entrepreneurs, and different great minds from different parts of the world. Through this, they compete for the Global Winner title and that helps them sharpen their business minds.

Other Startup Competitions include: Fundbox (U.S.) z First Round Capital (U.S.) z Jumpstart Foundry (U.S.) z Launch (U.S.) z TechStars (U.S.) z Seed Capital (U.S.) z

Chapter Six

187

Summary Startup competitions are also good opportunities for raising funds that are available for startups. All participants partake by submitting their business plans or present a working sample of their products. The most outstanding projects or business plans get advanced up until the competition’s penultimate stage, where a winner is selected. The idea or business plan must be presented in an engaging pitch. This pitch must be presented flawlessly to sell the idea to anyone worth the investment. By definition, startup competitions reward the perceptively best idea or business plan pitched by individuals or teams. Central Startup Competitions in the World: AngelPad z TechCrunch Disrupt z Web Summit (Dublin) z LeWeb (Paris) z 7VPS Seven Ventures Pitch Day (London, Berlin). z

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Chapter Seven

Other Sources

Retain Your Day Profession If you currently have a job that pays your bills and caters for your financial needs, it is ill-advisable for you to quit your day job and establish a business immediately. Take your time to establish your business and endure through the early years. Do not expect the business to start yielding profit. At this point, your regular job should be used to pay your bills at least until your business starts yielding returns. The importance of your stable paying job at this time cannot be overemphasized. It also eases off from you unnecessary financial pressure. In some instances, your day job’s pay might be enough to cover your business’s running costs.

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Business Fund Quest

The existence of a viable paying job allows you z to experiment and learn as you improve on your entrepreneurial skills and businesses. It protects you if the business fails, and you can walk away secured with minimal losses and the lessons learned from the venture. Without the overwhelming desire to start earning z

returns, you can carefully observe customer needs’ trends and determine how to perfect your products and services to their needs.

When you’re dependent on your emerging business z to generate revenue, you’ll often have to accept low-paying or unwelcome gigs. The paying job can be a good source of finance for z the business when other options are few.

Other Sources

191

Enquire a Lawyer While it’s often enticing to take any fund offered, the legal consequences of how you are paid can make or mar a company. To better understand your obligations after being funded and ensure that startup funding you take is really in your business’s best interests, it may help to speak with an experienced and profesional startup lawyer. A startup lawyer works with startups, entrepreneurs, emerging companies, early-stage companies, and SMEs. The startup attorney’s job starts with the inception (incorporation of a legal entity). It goes on till the exit, encompassing general legal counseling all across the way. Drafting various contracts and agreements form a core part of services provided by startup lawyer. Also, providing advisory related to employee stock options (ESOPs) plans and setting up equity structure among co-founders is another mainstream service sought by startups from a business lawyer.

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Business Fund Quest

Advice Accessible by Startup Lawyers Legal Documents Essential to Incorporate a Startup z Choosing Proper Legal Entity to Suit Needs of z Startup

Exact Time to Incorporate a Company for a Startup z Drafting Co-founders Agreement z Deciding Stock Options Among Co-founders of a z Startup

Determining Intellectual Property (I.P.) Created by z Startup

Protecting Intellectual Property Rights (IPR: Patz ents, Trademarks, Designs, Copyrights, Trade Secrets, Domain Names) Confirming z

Startups Intellectual Property (I.P.)

Ownership by way of I.P. Assignment Agreements, Employment

Contracts,

External

Vendor

(Consultant) Agreements, Product Development Agreements, etc. Certifying z

Taxation

Compliance

and

Tax

Management for Startups

Incorporation of Appropriate International Legal z Entities

Other Sources

193

Product Presale Pre-orders offer a product to a customer that won’t be delivered until some point in the future. In most cases, the customer must pay at least a portion of the purchase price in this process. A good presale is a useful tool for startups as it secures public interest in their products and services in the future. The marketing strategy is up to the decision of the entrepreneur. You can employ a crowdfunding site such as GoFundMe and use it to introduce your products and services to the market. It serves as an effective alternative to email marketing. However, either option is viable for a successful presale.

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Business Fund Quest

How to Set up a Successful Presale?

Start a Crowdsourcing Campaign:

Make use of the crowdfunding site or email marketing platform interface and use it to establish a network comprising of locals and people abroad. Set up the pages with all the necessary details and provide access links to your services and products. Advertise Your Presale:

1.Find ways to publicize your product’s presale. Consider options such as email marketing, social media, or only by word of mouth.

2.Ensure to stay focused on the other side of the process: the actual production of your item or service.

3.Ensure that you always give out quality products and let your customers get the best of you.

Post Your Product:

After establishing a campaign, start your presale period to collect sales and gauge interest in your audience. Get feedback from most loyal customers. Release Your Product and Follow Up:

Sell your product to the initial buyers and ask for appropriate feedback. Use the feedback to improve your business.

Other Sources

195

Advantages and Disadvantages of a Presale The most significant recompense of a presale is it gives you a solid customer base to improve your products or services. If there is a fixed date for your product to be released and you know people will buy your product, you must then place your focus on ensuring the product is totally up to standard.

While you technically have more time to work out any issues, you also open yourself up to delays and other quality issues. It allows you to properly evaluate your product’s weaknesses before your product’s release date.

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Business Fund Quest

Funding through a Self-Growth Fueled Model. New Entrepreneurs should not sacrifice the quality of work in launching a multi-million dollar corporation overnight. Rather, they should focus on the initial core customers, build loyal and long time customers, find new yet useful customers, and consistently strive to be remarkable to their existing customers. Entreprenuers should know be ready to create standard which will spread their names and help them build great goodwill. With that, they will get more customers and advance their business. Soon, fund will start coming, and you can then use the available funds to expand your business and produce more products. However, as an entrerpreneur, you should never let your quest for funding to deprive you of chances to advance your business.

Furthermore, on no occasion must you be desperate to the extent that you cede better part of your business to your sponsor under any arrangement.

Other Sources

197

White Label Agreement The White Label is an arrangement whereby a company produces its goods and services, and another company uses with its brand. It is a common strategy adopted by companies selling softwares, electronics, etc. The reseller obtains a possibility to quickly startup in any market and reduces its costs connected with the production process. The selling company is only concerned with the business’s transactional part and profit earning without investment in production. The reseller does not influence the production process of the original manufacturers.

The manufacturer may sell its products and services without paying additional costs concerning advertising and promoting its products.

Moreover, the White Label Agreement option allows the manufacturer to expand the range of customers and their services to then form a successful and working business model which can be offered to other potential similar partners in the same niche or business.

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Business Fund Quest

The terms stated within the agreement include: Relationship between both parties and their legal z nature

Production z The license of the agreement z The rights and obligations of both parties z Marketing materials z Packaging and documentation z Orders and pricing z Product quality control z Repair services and customer support z Intellectual property rights z Division of profits between parties z Product Warranties z

Other Sources

199

Chapter Eight

Financial Options For Veteran-Owned Business

Veteran small-business owners form a vital part of the U.S. economy. Veteran-owned business has about

7.2%

of the

nation’s total businesses -about 5.5 million enterprises are

owned by veterans with employees, according to the U.S. Census Bureau.

These businesses still require assistance, and this is provided through loans, small-business grants, and other critical financial resources.

Veteran-Owned Business

201

Loans Some

of

the

available

loans

for veteran-owned

businesses include: Small Business Administration (SBA) Loans: This loan is generally available

for anyone interested in starting a business in the United States of America. The applicants can obtain an amount within the range of $500 to $5.5 million in

funding. However, this depends on the qualifications of the business. It is relatively easy to apply for a loan using the SBA Lender Match tool. It only requires providing necessary information about your business. This information must be genuine and up-to-date and related to the program’s financial options that cater to veteran-owned businesses.

SBA Veterans Advantage: This is a loan

option explicitly made for veterans. The categories of eligible people for this kind of loan are Veteran (but not dishonorably discharged); Service-disabled Veteran; Participant in the Transition Assistance Program (TAP); Reservist; National Guard member; Spouse of any of the above.

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Business Fund Quest

The Military Reservist Economy Injury Disaster Loan Program (MREIDL): This

loan is available for small businesses that lose an employee on active duty.

The StreetShares Foundation: This or-

ganization provides loans and grants to veterans or their spouses for small businesses. This may include monthly grants based on the social impact and viability of the business idea and diverse shortterm loans specifically meant for small businesses.

Hivers and Strivers: This group thrives

as an angel investment organization that meets veterans’ businesses’ needs. It provides funds explicitly for established companies by graduates of the United States military academies. The scope of companies it invests in is not limited to any industry, and it provides expert ideas on business development. As specified by the organization, the investment range is between $250,000 and $1,000,000.

Veteran-Owned Business

203

Entrepreneurship Training for Veterans These are:

Boots to Business (B2B): This is an en-

trepreneurship training that comes at no cost for veterans. It is offered as part of the Transition Assistance Program. It starts as a two-day program that is non-virtual, which treats the basics of business ownership. It is then accompanied by the participants attending specific online educational courses.

Veteran’s

Business

Outreach

Center

(VBOC): The purpose of a Veteran’s Busi-

ness Outreach Center is to provide adequate training, counseling, mentoring, and other resources to ease the development of Veteran’s business. They offer the right training courses for achieving this goal, whether it’s Boots to Business or a related program. This is simply done to encourage the veterans to go into business or advance their already existing businesses.

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Business Fund Quest

Entrepreneurship Bootcamp for Veterans (EBV): The Bootcamp provides a

thorough business training camp for veterans and their family members, and it empowers disabled veterans. Stats have shown that about

72%

of

the graduates of the Bootcamp end up starting their businesses. This program is a valuable option for those looking for training that enables accountability. It is free for the veterans of 9/11.

National Veterans Entrepreneurship Program (VEP): This boasts virtually

the same motive as the Entrepreneurship Bootcamp for Veterans (EBV). This is a three-phase training program which spans about eight months period. The program takes place in Oklahoma.

Veteran-Owned Business

205

Veteran Women Igniting the Spirit of Entrepreneurship (V-WISE): This pro-

gram is for female military veterans. It is aligned with the SBA’s goal, and the Institute for Veterans and Military Families at Syracuse University presides over it. Female veterans are encouraged to make use of this opportunity and improve their businesses and lifestyles.

Veteran Institute for Procurement (VIP):

This training program focuses on federal procurement. It was made explicitly for veterans who already have a business. Their program offers three main training programs in person, and it holds four times in a calendar year. Veterans can key in to this program at anytime of the year.

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Business Fund Quest

Summary Veteran small-business owners form an essential part of the U.S. economy. This is because about 7.2% of the nation’s total businesses, meaning -about

5.5

million enterprises

are owned by veterans with employees. This data is in tandem with the U.S. Census Bureau.

Loans for Veteran-Owned Business

- - - - -

SBA Loans SBA Veterans Advantage Military Reservist Economy Injury Disaster Loan Program (MREIDL) The StreetShares Foundation Hivers and Strivers

Training for Veteran Business Owners

- Boots to Business (B2B) - Veteran’s Business Outreach Center (VBOC) - Entrepreneurship Bootcamp for Veterans (EBV) - National Veterans Entrepreneurship Program (VEP) - Veteran Women Igniting the Spirit of Entrepreneurship (V-WISE)

- Veteran Institute for Procurement (VIP) Veteran-Owned Business

207

Chapter Nine

Government Programs

What is Government Programs? Governments are looking at funding startups and innovation in their communities. Though the competition is fierce, coupled with stringent criteria, access to this relatively cheap startup funding can be an absolute game-changer for a startup. Grants are usually available for high-end technological and scientific research developments and projects. Even under these categories, they may apply more to some fields than others, which forms the basis for certain restrictions on who can apply for the grants. This is done to screen out some businesses and streamline the grant to target companies and individuals. They will usually require you to match the funds that are given with other funding. Grants typically require you to be very detailed on how you will spend the money and have varying control mechanisms afterward. Government-backed loans are desirable to new businesses as they typically offer better repayment terms over a more extended time. Government grants are provided as support to aid the development of companies with high growth potential. Government Programs

209

It is an opportunity for the generation of employment, wealth, and promotion of indigenous industries. The Government has initiated a few loan schemes to provide collateral-free debt to aspiring entrepreneurs and gain access to low-cost capital. Government funding is provided for the following reasons:

To help businesses expand in their market and provide them with a means of implementing their developmental strategies.

To help new and existing companies procure technologically advanced equipment that delivers better longterm.

To aid the training and recruitment of skilled individuals.

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Business Fund Quest

To unearthen novel ways of doing things in relevant fields such as science for the benefit of humanity. Naturally, a minimum requirement of a startup for applying to win government grants.

Full information or description of the project;

Define the merits of the project;

Highlight the proposed expenses that will cover the operating cost of the project;

Provide information about the background of those partaking in the project. Government Programs

211

Advantages of Acquiring Funds through Government Schemes

z

Government funding supports critical business development.

z

Government funding improves the chances of success of a project.

z

In some countries, startups registered under various Government programs or schemes can be exempted from tax, up to a fixed period.

z

Relaxed norms for Public Procurement: There is no requirement to have ‘prior experience’ or a ‘requisite’ turnover.

z

Startups are also not required to have any prior experience to be eligible to receive such government tenders/assistance that come from a grant.

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Business Fund Quest

Disadvantages of Acquiring Funds through Government Schemes

z

To get a government grant, one must have a feasible proposal. This is sometimes difficult. The

government

agencies

that

provide

these types of funds have stringent criteria. Completing your proposal requires research and this also takes time, energy and attention.

z

Government loans are given to be used for short term; if you do not make a good plan, you will run out of funds and close the business. Another thing is the fact that one cannot use government loan just anyhow they wish.

z

Government entities are more risk-averse than private funders, and they do not provide lump-sum awards. Instead, they reimburse costs, which can be difficult for a small non-profit to grapple with due to lag times between fronting payments and waiting for reimbursements.

Government Programs

213

Examples of Government Programs around the World

1

SBA Loan Programs (U.S.):

The SBA is an organization that collaborates with firms

and money lenders to generate loans for businesses. The agency employs specific organizations as intermediaries to provide this sort of loan. Instead, it sets the rules and regulations through the terms of the organizations. It exists virtually to provide an easier way of obtaining funds. The interest rates and other fees are not too different from non-guaranteed loans. This program helps businesses advance as it gives access to loans.

2

Community Development Financial

Institutions (U.S.):

Community

Development

Financial

Institutions

(CDFIs) are private-sector financial institutions that focus primarily on personal lending and business development efforts in more impoverished suburbs

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Business Fund Quest

that need major infrastructural facilities in America. The United States Department of Treasury provides funding for CDFIs after they duly submit applications as required by the agency. Other sources of funding include

private

fundings

from

high

net-worth

individuals, corporate firms, and religious bodies. The primary role of Community Development Financial Institutions (CDFIs) is to meet the needs of the workingclass individuals residing in local communities that have been marginalized commercial banks.

3

Market Readiness Investment Program (Canada):

Through its Market Readiness (M.R.) Investment

Program, Ontario Centres of Excellence (OCE) makes investsment on companies directly and this is done to support their growth and further these compannnies early-stage commercialization, making them a scalable business. The Investment Readiness Program (IRP) which is well known is a 2-year $50 million pilot program that was practically designed to help advance Social Innovation

and Social Finance (SI/SF) in Canada. This is aimed to be achieved by building on existing supports to help catalyze community-led solutions and wayouts to stubborn and persistent environmental and social challenges.

Government Programs

215

4

SR&ED Tax Credits (Canada):

The Scientific Research and Experimental Development

program established by the Canadian government is a generous incentive program that provides funds for small and large companies. The fund is disbursed to enable them conduct Research and Development activities in Canada. These tax incentives come in three forms: reducing taxes, an investment tax credit, or a cash refund. This program is the most extensive federal program that supports R&D in Canada. The program provides more than $3 billion in tax incentives to over 20,000 claimants each year.

5

Canada Small Business Financing Loan (Canada):

The loans are provided for small scale enterprises and

small businesses. These loans are given to businesses to help them procure equipment that will aid the operations of their businesses or expand their business. This loan program gives small business owners a chance to borrow up to $1,000,000 to do the needful to procure equipment and expand the business.

It is also a government program designed to help existing companies or startups acquire the necessary financing to purchase equipment, leaseholds improvements, and property.

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Business Fund Quest

6

Futurpreneur Loans (Canada):

Futurpreneur Canada is the only national, non-profit

organization

which

provides

mentoring,

financing,

and support tools to aspiring and, small and medium enterprises, up and coming business owners aged 18-39. So,

if you’re launching, mentoring, or becoming a partner in a startup, you could access a loan of $15,000 to start or buy a business. To be eligible, first of all, you’ll need to create a solid business plan for a company that’ll employ you fulltime. Secondly, you’ll need to work with a mentor for two years. You can also secure an extra $30,000 loan through the Futurpreneur Canada-BDC Start-Up Program if eligible.

7

Entrepreneur Program (Australia):

The Entrepreneurs’ Program helps transform Australian

businesses. The program’s unique services give eligible businesses access to expert advice that money can’t buy. It also gives access to financial support through grants and incentives. The Entrepreneurs’ Program provides a suite of exceptional services to help Australian businesses strengthen, grow, innovate, and commercialize. They are specifically designed to help achieve the business vision, facilitated through expert advice and financial assistance. Government Programs

217

8

Startup India (India):

Startup India is a flagship initiative of the Government

of India, intended to develop startup culture and build a healthy ecosystem for encouraging entrepreneurship in individuals of all age brackets in India. Since it was first launched Mid-January

2016,

the initiative has overseen

several beneficial programs to aid entrepreneurs, and make India into a country with lower unemployment rate by helping entrepreneurs create more jobs. The initiative has aided the Federal Government to gradually achieve its aim to empower Startups to contribute more to its growth through innovation and design.

9

PMMY (India):

The scheme was established in

2015.

It is reputed for

providing ten lakhs worth of loans to small enterprises. The organizations that are authorized to provide these funds include Commercial Banks, Small Finance Banks, NBFCs, etc. The loan is known as MUDRA loans, categorized under three names: Shishu, Kishore, and Tarun. The purpose of this was to distinguish its different stages of development of the startup that requires funding.

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Business Fund Quest

10

Start-up Chile (Chile):

Start-Up Chile is a program established by Chile’s

government. It provides equity-free investment for qualified businesses. The program is designed to help businesses get off the ground. It thrives under the management of the Chilean Economic Development Agency (CEDA). The organization is charged with the sole mission of developing entrepreneurs that will create innovations to improve general productivity in Chile. This can cause influx of a new generation of entrepreneurs and attract leading entrepreneurs to establish their startups in the country. Chile is projected to become the entrepreneurship hub of South America as a result.

Government Programs

219

11

Government Programs in Africa:

The South African government funding institutions and

grants focus on providing funding for business ventures that can differentiate the country’s economy. These programs/departments include: Department of Trade and Industry (DTI) z Industrial Development Corporation (IDC) z KFW Development Bank z KZN Growth Fund z Land Bank z

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Business Fund Quest

12

Startup Europe:

Startup Europe is the European Commission’s ini-

tiative to connect high-tech startups, scaleups, investors, accelerators, corporate networks, universities, and the media. It is reinforced by a portfolio of projects funded by the E.U. and policy actions such as the E.U. Startup Nation Standard, Innovation Radar, and the Digital Innovation and Scale-up Initiative (DISC). The several programs under Startup Europe are: EIC Accelerator z EIT Knowledge and Innovation Communities z Erasmus for Young Entrepreneurs z Calls for Third Parties z Eureka-Eurostars z

Government Programs

221

Summary Grants are usually available for high-end technological and scientific research developments and projects. Even under these categories, they may apply more to some fields than others, which forms the basis for certain restrictions on who can apply for the grants. They will usually require you to match the funds that are given with other funding. Grants typically require you to be very detailed on how you will spend the money and have varying control mechanisms afterward. This means that for an individual to qualify for the grant, such person must have a useful and workable businesses plan in place. Government-backed loans are desirable to new businesses as they typically offer better repayment terms over a more extended time. Government grants are provided as support to aid the development of companies with high growth potential. Government funding can fund Business Expansion, Capital and Technology, Hiring and Training, Research, and

Development.

Standard

Government

Programs

around the world are: SBA Loan Programs (USA) z Community Development Financial Institutions z (USA)

Market Readiness Investment Program (Canada) z

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Business Fund Quest

SR&ED Tax Credits (Canada) z Canada Small Business Financing Loans (Canada) z Futurpreneur Loans (Canada) z Entrepreneur Program (Australia) z Startup India (India) z PMMY (India) z Start-Up Chile (Chile) z KFW Development Bank, Land Bank, KZN Growth z Fund, DTI (Africa)

Startup Europe- EIC Accelerator, Eureka-Eurostars, z EIT Knowledge for Innovation Communities.

Government Programs

223

Chapter Ten

Grants And Subsidies

Grants The appeal of grants as a form of startup funding is quite noticeable. This is because money businesses offered does not have to be repaid as long as specific goals are met. The fact is the criteria for being awarded a grant are likely to be strict, therefore, vast majority of startups are awarded a trivial amount rather than enough to be able to fully fund their business for quite a few years. There are lots of grants available to encourage research and development (R&D) activities. Also, there are specific capital allowances available for businesses that carry out R&D. The registration process when you want to get grants can be competitive and time-consuming. Another fact is that, small business grants are scarce and highly difficult to get because of the number of people that can apply for it.

Grants And Subsidies

225

Aside from the requirements of the organization awarding the grant, three other factors may affect your eligibility for the grant: A good business plan is one of the critical pieces that make up a successful business plan. Do not think twice about it, ensure you include it in the grant application. It provides the proposal reviewers with clear information about the mission and prospects of your business. The content of your application must align with the organizations’ vision and purpose that award small business grants. If the organizations’ vision is to encourage entrepreneurship in slums and undeveloped communities or inspire businesses’ resuscitation in a changing society, then the content of your application must carefully reflect those things. This will underline the terms upon which your application will be examined, that is, according to the grant’s purpose.

It is imperative to write a professional and well-written application. Add all the necessary data and documents, backing all the details in the application. This can be key to obtaining endorsements that will boost the chances of your ideas.

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Business Fund Quest

1

Government Grants for Small Business

The Federal Government of a nation can award grants.

However, if you want to get a grant, it can be overwhelming to find a fitting grant to access. The grants available are either Government funded or funded by non-government entities such as: Grants.gov z EPA Grants z

2

Corporate Business Grants

Certain corporations often offer smaller businesses

the opportunity to obtain grants. Such a program is highly competitive or focuses on specific industries or areas of business. Examples of corporate bodies that offer Small Business grants include FedEx, Lending Tree, National association of self-employed (NASE), Fundera (The Zach grant), Idea Cafe, Walmart Foundation, Wells Fargo, etc.

Grants And Subsidies

227

3

Business Grants for Women

It is generally difficult for new businesses or startups to

truly earn a profit, but it is even worse off for women-led companies. Statistics from the loan market have shown that women are much less liable to obtain regular loans for their businesses. As much as there are some grants for male and female-led businesses, specific grants are also made specifically for women. Some of the grants offering funding options for women include: The Amber Grants z The InnovateHer Challenge z Open Meadows Foundation Grant Program z Tory Burch Foundation Fellowship z

4

Business Grants for Minorities

Many business owners are unable to secure funding due to

their minority status. This restricts their access to affordable small-business loans and grants. There is a need to obtain financing for these businesses. Some of the options available are the Minority Business Development Agency (MDBA) and the First Nations Development Institute Grants.

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Business Fund Quest

Subsidies A subsidy is a benefit that arises from payments and tax breaks awarded by government bodies to organizations or individuals for their contributions to the public (e.g., promoting the public). It eases the burden of the recipients and supports them financially in accomplishing their goals. There are two types of subsidies: Direct Subsidy and Indirect Subsidy. z

Direct Subsidies is the actual payment of funds to

the recipient.

z

Indirect Subsidies are not about offering funds, but

it can come in the form of a reduction in taxes and government-supported services.

Grants And Subsidies

229

Tax-Increment Financing (TIF) Tax increment financing, or TIF, uses a portion of the taxes paid by a particular company to help fund a capital developmental project. The TIF pays for the rehabilitation or repair of infrastructures in areas of new development. The Tax-Increment Financing can be used to procure lands, plan, demolish and renovate buildings, clearing of contaminated environment, or finance empowerment programs. The

TIF

allows

governing

bodies

to

invest

in

improvements while being independent of other more expensive finance sources, such as increased tax dues and intergovernmental transfers. With TIF, the Government can be financed with little to no impact on fiscal policies. It is a viable source of infrastructure funds before the onset of the project. Funding that arises from this is committed to revitalizing the urban community and inspiring favorable fiscal policies.

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Business Fund Quest

Criticisms

There have been criticisms about the relevance of specific infrastructure otherwise deemed unnecessary, including paying companies to relocate to new development areas. This has to do with poor application.

Another criticism is that certain cities have obtained TIF funds for large districts, and they capture revenue for new development areas that, irrespective of TIF funding, would still appreciate.

Grants And Subsidies

231

Summary Grants are usually issued for newly intended projects that have restrictions placed on them. The most common grants are available for scientific research and development. The benefit of grants is that unlike other finance forms, it does not require repayment as long as specific requirements are met. A subsidy can be seen as an accrued benefit that arises from payments and tax breaks awarded by government bodies to organizations or individuals. This is done to appreciate or encourage positive contribution from companies to the public (e.g., promoting the public). It eases the burden of the recipients and supports them financially in accomplishing their goals.

Types of Grants are: I. Government Grants for Small Business:

The grants available are either Government funded or funded by non-government entities such as:

● Grants.gov ● EPA Grants

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Business Fund Quest

II. Corporate Business Grants

Examples of corporate bodies that offer small business grants include FedEx, Lending Tree, National association of self-employed (NASE), Fundera (The Zach grant), Idea Cafe, Walmart Foundation, Wells Fargo, etc.

III. Business Grants for Women

Some of the grants offering funding options for women include:

● The Amber Grants ● The InnovateHer Challenge ● Open Meadows Foundation Grant Program ● Tory Burch Foundation Fellowship IV. Business Grants for Minorities

● Minority Business Development Agency (MBDA) ● First Nations Development Institute Grants V. Miscellaneous Grants

● Global Innovation Exchange Funding Database.

Grants And Subsidies

233