Entrepreneurs must have good command over finances for implementing good financial management that steadies the business and drives it toward growth says VIC DI CRISCIO. At the same time, they must have knowledge and information about the sources from which they can avail funds for financing the business. Awareness about different financing options gives entrepreneurs more freedom to choose the most appropriate type of financing that matches the business plan.
Borrowing or taking loans is the traditional method of business financing in which banks, credit unions, and financial institutions play a crucial role, explains Vic Di Criscio. Besides the conventional ways of funding, there are some alternative financing methods too.
Also known as external financing, this method consists of arranging capital for businesses by approaching some financial institutions and agencies that usually offer business loans for some extended period against some collateral which in some cases might be the business itself. Entrepreneurs might also provide their business equity in exchange for funds by agreeing to part with a portion of the ownership of the business or allowing the investor to exercise some control over the business. Some other types of financing by Angel Investors and Venture capitalists are also part of external funding.
Venture capitalists own some professionally managed firms that mop up funds from private investors. And put them in high potential business ventures for ensuring good returns. However, venture capitalists are outright businessmen and interested only in earning profits. To pay back to the people who have given them the money for growing it fast. Typically, trusts and high net worth individuals entrust their money with Venture Capitalists for investing in some businesses to reap rich dividends.
Angel investors have a close connection to entrepreneurs as they look for suitable investment opportunities. While also interested in participating in the business through some collaboration. Also, Angel investors take up the role of business partners. Since they want to ensure profitable returns from the investment. They are ready to advise and provide guidance for quickly increasing the revenue earning. Angel investors not only have a wealth-sharing agreement with the business owners. But is also keen to do some good for society. Many successful entrepreneurs later turn into Angel investors. And can play the role of business managers to drive the business toward success.
The financing arrangement consists of entrepreneurs selling some shares of the company to individual investors or a group of investors. Some private equity firms might also pick up some takes in the business. While the entrepreneur retains the majority of the ownership. Investors typically put in their money in businesses that are on the growth path. As the chances of quick returns are more.
The above financing methods involve external sources for providing funds. Bootstrapping is an internal financing method like the entrepreneur putting in his own money. Or collecting money from individuals who already have some interest in the business and are even ready to provide services. Offering sweat equity to stakeholders is a typical example of Bootstrapping, and the technique is helpful for moderate fund requirements.