Angel funding is used to provide a startup business with equity investment to fund growth. The angel investor is seeking higher returns for the risks involved and tries to limit the initial valuation placed on the business in order to maximize their equity percentage.
The availability of finance for a startup business determines its ability to expand and grow. By using bootstrap finance the growth will be slower but the value of the business needed to meet the personal financial goal of the entrepreneur will be smaller.
A business needs to finance its working capital requirements using a combination of short term and long term funding sources. Permanent working capital is best financed with long term funding such a equity or long term loans, whereas temporary seasonal working capital is best funded by short term loans or overdraft facilities.
The capital structure of a business is the mixture of equity and debt it uses to finance its operations. The optimum capital structure is one which minimizes the weighted average cost of capital and thereby maximizes the valuation of the business.
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.
Start-up businesses use convertible promissory notes to raise seed capital finance as they avoid the difficult process need to value the business valuation. The loans are repaid by the issue of new shares to the noteholders.
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.
Last modified February 11th, 2019 by Michael Brown
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.