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Business Funding Sources Article

Business Funding Sources and Business Capital Considerations

Business Funding Sources

Overview

This article is Part Two of a three part series about business finance. Please review the Part One article, Financing a Small Business, before reading this article. After reading this article, we recommend reading the Part Three article, How to Analyze Funding Sources & Strategies for Your Business.

You are developing your Business Plan and analyzing your capital requirements, so now you have to determine where to get your Capital and at what price.

Need help with your Business Plan? ABC Business Consulting offers four levels of Business Plan Services.

This Article is divided into Two Main Sections:

  • Section One: Business Capital Needs, Pitfalls and Considerations

You need to understand clearly how Capital works; what your Capital and Business Finance Needs are; the Capital and Commercial Loan Pitfalls to avoid; and how to Analyze Your Capital Needs, to determine the right Capital Finance Structure for your Business, before determining what sources and forms of Commercial Finance are applicable and suited for your Business.

  • Section Two: Forms & Sources of Commercial Finance

With your Business Capital Finance Analysis completed, it is good to understand the Forms and Sources of Commercial Loans in the marketplace so you can determine the right mix of financial products to meet your Business Finance & Capital Strategy.

I. Business Capital Needs, Pitfalls & Considerations

A. Business Capital Needs: There are many reasons why a Business needs additional Capital. Some of them are (often in combination):

1. Cost Saving Opportunities:

a. Obtaining better Equipment which will lower production costs, stream line operations, and results in reduced operating expenses.

b. Taking advantage of Quantity Discounts or Increasing Stock prior to a supplier’s price increases, to realize substantial savings on your Inventory Purchases.

2. Growth & Expansion:

a. Take advantage of developed Opportunities.

b. Growth translates into a larger volume of Receivables and bigger inventories.

c. Need to hold larger sums of Cash to meet obligations with outside vendors and internal business needs.

d. Expand new branches, new products or increased capacities.

3. Inventory Control:

a. Seasonal events which demand building up inventories and staffing in advance- receivables may not be fully collected until well after the season ends.

b. Mismanagement of Assets have allowed Inventory and Accounts Receivables to be over or under stocked.

4. Economic Conditions Change:

a. Sales and profits have declined temporarily.

b. Due to changing Economics, customers are slower and longer to pay.

5. Cash Crunch:

a. Can’t meet current repayment of obligations and debts.

b. Failing to keep sufficient Retained Earnings in the Business.

B. Capital Funding Pitfalls to Avoid:

1. Not using Financial Professionals and Business Consultants to determine the appropriate Business Finance Vehicles and Structures.

2. The Company’s long-term goals have changed, and its Finance Strategy hasn’t been modified to reflect the changes.

3. Confusing short-term with long-term Capital needs, thereby, using inappropriate Finance Instruments and Products.

4. Unaware of changes in Financial Product Offerings and Terms in the Marketplace.

5. Lack of banking and funding relationship.

6. Lack of long-term and short-term planning.

7. Poorly conceived or executed Capital Structure and Finance Strategy.

8. Equity Finance that has severe Anti-Dilution Provisions; expensive terms in convertible debt, grants, warrants and options; securities law compliance issues; and too many unsophisticated investors.

9. R & D Structures and Joint Ventures/ Partnerships which cause equity dilution, cash flow drains and expensive licensing agreements.

10. Involved with a Finance Structure which hampers acquisitions, growth or Public offering alternatives.

11. Capital & Finance Instruments which aren’t customized to a company’s specific requirements.

12. Not utilizing specialized Accountants, Attorneys and Finance Professionals to: formulate long-term and short-term finance strategies and objectives; save considerable time and money in finding appropriate funding instruments and sources; provide realistic transaction and terms perspectives and outlooks; and put together an effective Funding Negotiation Team and Process.

13. Not being involved in the Finance Strategy Implementation enough and relying on loan brokers and finance intermediaries who don’t know your Short-Term and Long-Term Funding Needs and Requirements adequately.

C. Business Capital Considerations:

Things to consider when formulating and analyzing your Business Finance Strategy:

1. Short-Term Financing Strategy:

a. Inventory Control

b. Working Capital & Cash Needs

c. Accounts Receivables Management

d. Accounts Payable Management

e. Contingency Fund

f. Opportunity Fund

2. Long-Term Finance Strategy:

a. Equity split arrangements with Founders, Management, Key Employees, Partners and Investors.

b. Does Present Business Financing meet Long-Term Objectives?

c. Securities Law Compliance.

d. Liquidity needs and requirements.

e. Good fit with Investor Groups and Venture Capital Firms who can help meet long term finance goals and bring needed resources to bear.

f. Adequately planning Financing Rounds and Stages in your Company’s Growth Plans. Too many rounds or stages without adequate levels of Capital Infusions can increase transactional costs, absorb too much of your Company’s time, inhibit timely development when needed, cause a strain of low cash reserves and reduce future finance bargaining leverage.

g. Formulate an Investor/ Venture Capital Profile which meets your Company’s Long-Term goals.

h. Raising too much Capital or the wrong type of Capital in the Initial Round without using reasonably Staged Funding Strategy. Too much Capital is as expensive as too little capital, causing similar cash strains on the business. Not finding a good mix between Debt and Equity Finance can create a severe strain on cash flow (too much Debt) or hamper future long term profitability (too much Equity or the terms are too expensive).

i. Linking your Strategic Plan’s Objectives, Goals, Milestones and Performance with your Equity Funding Rounds’ timing, terms and amounts. Ensure you are not just trying to reach your Financial Goals but also meeting Managements’ Milestones. Venture Capital’s performance outlook (when considering another round of funding) may not be solely reliant on Financial Performance, as much as, concerns about whether management is reaching its prescribed goals and milestones (quantitative and qualitative).

j. Link Your Finance Strategy’s Funding Rounds and Events to your Strategic Plan’s growth objectives so that your Business Valuation has increased to a level which allows you to significantly reduce the risk for follow on funding from Investors and Commercial Lenders.


This article is an excerpt of a Chapter from our Business Success Guide. For the rest of the Chapter, please visit:  The Business Success Guide

The remaining major sections of the book’s Chapter have been left below as an outline so you can get an idea of what else is contained in this Chapter of the Business Success Guide.


 

I. Business Capital Needs, Pitfalls and Considerations

C. Business Captial Considerations (continued)

II. Forms & Sources of Commercial Finance

A. Overview of Commercial Loans: Forms & Sources

B. Short-Term & Long-Term Commercial Finance

C. Internal & External Sources of Business Finance

1. Overview

2. Internal Sources of Business Capital

3. External Sources of Business Capital & Finance

a. Suppliers & Trade Credit

b. Debt Capital Overview

c. Bank & Commercial Lender Finance

d. Equity & Venture Capital Finance

i. Overview: Venture Capital’s Hot Buttons

ii. Venture Capital Process, Strategies & Objectives

iii. Venture Capital Structure & Terms

e. Alternative Forms of Business Finance

III. Conclusion

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