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Types of Funding
Accounts Receivable Funding
For companies in labor
intensive industries where there are very few physical assets, accounts
receivable funding is an excellent way to leverage cash. The owner obtains
funds for the business based on the quality of the company's accounts
receivables and its clients' credit history. The company's credit history is
not a factor in obtaining funds, and lenders typically make relatively quick
decisions.
Acquisition Financing
If your business is already a
proven ongoing business concern, acquisition financing can enable your business
to expand by acquiring the stock and / or assets of another business.
Acquisition financing involves leveraging your company's equity in order to
borrow the funds needed to acquire the other company. Your ability to service
the loan and maintain favorable debt-to-equity ratios is a critical factor in
obtaining acquisition financing. Angel Investors
Individuals who
are generally interested funding in high-risk, early-stage deals or business
concepts are called "angels" because they are willing to invest "where others
fear to tread." Typically they provide their own personal capital and are the
leading source of real risk capital.
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Average Investment Range: |
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60% invest under $50,000.00 |
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40% invest $50,000.00 to $500,000.00 |
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60% of Angels invest in start ups |
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Investment standards are not as rigid as banks or venture
capital companies |
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Investor is usually not interested in obtaining or
exercising control |
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Typically the decision making process is quick and may
only take a few weeks. |
Angels generally favor early-stage businesses that can
benefit from smaller investments (less than $1 Million). Angel investors are
typically entrepreneurs who have become wealthy, often in technology-related
industries, and they can sometimes provide contacts and experience that is
helpful in navigating the challenges of building a business.
"A" Round Funding
Financing event where venture
capitalists invest in a company that was previously financed by the founders
and/or by angel investors. The "A" refers to Series "A" Preferred stock, which
is normally what is used to secure the investment.
"B" Round Funding is a
financing event where professional investors such as venture capitalists have
strong interest in a company and provide additional funds after the "A" round
of funding has been completed. Depending on investor interest and the needs of
the business, "C" Round Funding is possible, followed by "D" Round Funding.
Bank Loans
Traditional commercial banks usually will lend money
to businesses for start-up or expansion; they typically do not fund high risk
ventures. In addition, they typically have very well-defined guidelines, based
on the following criteria:
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Positive cash flow for 2 or more years, demonstrating the
company's historical ability to pay the Debt Service on the proposed loan |
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The company's Positive Tangible Net Worth, indicating
that the relationship between your combined new debt and Tangible Net Worth of
your business will not exceed a 2:1 ratio |
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The business has a good credit history and can explain
all derogatory statements |
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Up-trends in your industry, your business, and its annual
sales and net revenues |
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Experienced and strong financial and operational
management teams |
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Owner's willingness to repay the debt |
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Owner's personal guarantees. |
Bridge Loans
Bridge loans are short-term loans that
enable a company to "bridge" the gap between its current need for immediate
cash to continue operations and the future closing of a pending investment deal
or long-term financing package. Bridge loan funding requires complete repayment
within a very specific timeframe and is contingent upon the probability that
your company's pending deal with close.
Syndicate Funding
A number of investors working
together as a group to fund a particular deal is a "syndicate." A lead investor
often coordinates these deals and represents the group's members. Syndication
among angel investors (an angel alliance) has become more common in recent
years; this enables them to fund larger deals that are usually handled by a
small venture capital fund. Syndication and syndicate transactions are usually
seen in financing large-scale projects. Venture Capital
Financing
Risk oriented businesses seeking early-stage funding can
frequently obtain those funds from investors who are interested in high risk
investments that promise a high return on their investment. Venture capital
investments are generally seen in start-up businesses that are perceived to
have excellent growth potential but do not have access to traditional capital
markets. Typically a business owner obtains venture capital funds by agreeing
to give up a combination of ownership and management control. The owner's
management experience is a critical factor in obtaining venture capital for
hi-tech businesses.
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Investments generally range from $500,000 to $5
Million |
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Venture capitalists typically expect a 20 - 50% return on
their investment |
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Primary focus is on companies with the potential to
generate $20 Million in annual revenues |
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Investor usually receives stock or promise of stock in
return for funds provided |
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Investor expects to be 'bought out" when the company
makes an initial public offering (IPO) or when the company is sold / merged.
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