Finding the money to springboard your new business can be tricky.
And cutting into your savings or borrowing from friends can leave you feeling miserable.
If scraping together enough cash isn’t your idea of fun, you may want to check out venture capital financing.
In most cases with getting access to money, you have to repay everything loaned to start the business. If you’d rather keep putting that money back into business, then Venture Capital should be considered.
Venture Capital is a unique solution for businesses that can help transform ideas into successful enterprises. But there are some things you should know about it first.
The Core of Venture Capital
The crux of venture capital is financing donated by investors. It’s commonplace for investors to help fund new companies and small businesses.
As you would imagine, there is an entry barrier to being financed.
The pros and cons of financing a company is weighed up by the investor.
Only companies that have the potential for long-term growth or companies that can provide a good return on investment are the ones given the needed start-up capital.
Investors have to take a risk on giving money to start up ventures.
However, this can result in them possibly having a stake in the company – and company decisions.
The risk is parallel to the reward, and above average returns can be very attractive.
Sources of venture capital can be from wealthy individuals, banks and financial institutions.
Take some time to talk to new entrepreneurs and investors and you’ll quickly find that it’s not particularly difficult to raise money.
People in the VC industry back in the 90s (before the tech collapse of 2001) all allude to the value of venture deals being even higher than they are today.
But some companies, though raising a huge amount of money, went bankrupt very soon after.
Some businesses raise capital for ventures with huge value estimations. This is despite not having much actual technology or funding behind the business.
However, for many entrepreneurs getting into business, the possibility of gaining venture capital is becoming less and less as standards become stricter.
The Pros And Cons of Venture Capital Financing
Deciding to go ahead with venture capital is a big step that takes much consideration.
Below are some of the pros and cons you can expect from this unique type of funding.
Business know-how is a great perk of raising venture capital. Aside from getting money to put into the business, those providing venture capital often give wisdom to young business owners.
Valuable guidance on how the money is best used can be part of this.
This can include a variety of business decisions, such as how to handle finances or human resources.
Making these types of decisions correctly early on can be very important for business growth.
In very important areas such as personnel and tax, additional resources can go a long way. Provided support will lead to greater success and quicker growth earlier on in the life span of a new business.
Vital relationships can be made due to the connections venture capitalists have.
Many of them are very well-connected within the business community and can help to speed up business development.
Equity financing is similar to venture capital financing, in that control of the company can be tenuous.
The larger the amount of money put into the company, the more likely that investors will want to have a say in how the business is handled.
The size of the stake they have can also be indicative of how much they will steer your company direction.
Depending on the stake owned, you may actually lose ownership.
If a company manages to take more than a 50% stake, then you would, in essence, be giving up ownership.
Larger venture capitalists will be able to see to their own terms – meaning that this is more likely an eventuality. This is particularly common amongst blue-chip venture capitalists, leading to dilution of the original team.
Finding an applicable venture capitalist lender for your concept can be difficult.
Proving your ideas are worthwhile can be a problem.
Finding someone that will still allow you to retain creative control is no easier.
Alternative Methods of Borrowing
Depending on how far you are in the life cycle of your business, there are a variety of options for borrowing.
Below, we’ve gone into detail about some of the ways in which you can decide whether venture capital is right for you. Some lenders will let you borrow more money than others, and some have interest rates that may not be to your liking.
Other lenders vary depending on the concept or business idea that you wish to execute.
To work out what is the best choice for you, you need to find out how much you can afford to repay and what the terms are of repayment.
Small Business Administration Loans
Small business administration loans can help businesses with good credit.
They must also have a good history of borrowing. This is a premium way of borrowing and if successful, it is possible for a businesses to get an injection of millions of dollars.
The money from small administration loans can be used for many uses.
These include refinancing, purchasing real estate, remodeling or buying equipment.
The requirement for this kind of loan, however, is that your business should’ve been active for more than two years. It also needs to have more than $100,000 in yearly revenue, as well as a great credit score.
Term loans are your standard loan.
Because they’re not offered specifically for business use, you may have to pay more interest than you would normally.
The interest rate on term loans can range from 7 to 3%, depending on your credit score.
You can use this for any relevant business cost, but you need to have been active for one year and have more than $90,000 in business income.
You could also try a short-term loan which can last a duration of just 3 to 18 months.
This is a great solution in the event that your credit score is less than ideal or money is needed right away.
Having such income at a moment’s notice is great for jumping on opportunities for growth. This can seriously help your business to change trajectory if trading has not been as good as expected.
Credit lines are a very adaptable solution for financing business.
They can allow you to get the money you need without having to pay for unnecessary interest and funds. This is a go-to option for enterprises that need capital overtime instead of money for one large purchase.
Interest rates for this kind of funding are not much different to credit cards, but depend on your credit score too.
In the case that your credit score is low, your interest rate will probably be fairly high.
You’ll also need to have proof that you can pay back the money on time. Opening up a credit line when you first start business can save you time acquiring one later down the line.
If you’re looking for money to get new equipment, then you could consider leasing said equipment rather than buying it.
This allows you to make payments steadily over a long period of time rather than in one go.
This is because the equipment itself is considered collateral.
The added bonus to this is that your credit score does not need to be as good in order to finance in this way.
You can also lease equipment in the early days of trading in order to see how your business does. This can save you paying upfront and possibly wasting money on maintenance.
Investing With Venture Capital
Investors all have differences, but in some cases what they want is not the same as what you would like.
With the ideas you have for your business and the things you wish to achieve, you may be at odds with them.
Many will want you to grow as quickly as possible, even if this causes you to eat through the money you have been loaned very fast.
Some venture capital investors would prefer you to build up a defense for your business. This is so they can safeguard against competitors rather than moving slowly and having someone else beat you to the punch.
Venture capital can be very useful for companies that are very much in need of a cash injection to get off the ground – but it isn’t necessary for every new enterprise.
When thinking about using venture capital financing, be honest with yourself and weigh up the pros and cons. You should also consider what type of business you would like your idea to become.
If you’re not in the running for a standard credit line and you do need a big boost of cash, Dealstruck can help you out.
They are designed to help you move to the next level, with much faster turnaround and lower APRs than many traditional lenders.