When a business is seeking funding it will usually require a valuation. There are various business valuation models which can be used including PE multiples, assets based and discounted cash flow techniques.
Equity financing is one method of funding a business. The cost of equity financing arises from the fact that part of the ownership of the business is sold in return for the funds, and a percentage of the profits now belongs to the investor shareholder.
Debt financing is one method of funding a business. The cost of debt financing is the interest and fees paid on the debt which are usually allowable for tax purposes. For this reason, the aftertax cost of debt financing is normally cheaper than the cost of equity financing.
The sustainable growth rate calculator formula can be used to calculate whether a business can finance its planned growth from internal sources of finance such as retained earnings, or whether it has to seek additional external finance by issuing new equity or amending its financial leverage.
Crowdfunding is a technique for a business to obtain finance in which small amounts of funding are raised from a large number of people (the crowd). Crowdfunding can be either rewards, debt or equity based depending on the requirements of the business.
The 5 C’s of credit is one technique used by financial institutions to assess the credit worthiness and risks associated with lending to a business seeking debt finance. An understanding of the five C’s of credit combined with financial projections, will allow a business to be better prepared when approaching lenders for debt funding.
There is a wide variety of funding available for a startup business, but one of the fundamental decisions which must be made by the entrepreneur is whether or not to seek outside equity and long term debt finance to fund growth or to rely on bootstrapping finance methods such as founders equity, short term debt, and revenue to grow the business.
The fundamentals of a businesses trading activity are that it buys from a supplier, holds inventory, and sells to the customer.
The amount of finance a business needs to carry out this day to day trading activity is known as the working capital requirement, and varies from industry to industry depending on the amount of time the business takes to pay suppliers, the amount of inventory held, and the time it takes to collect cash from customers.