Equity Investment for Your Business

Equity can be built up through retained earnings or by the injection of cash from either the owner or investors. Most banks want to see that the total liabilities or debt of a business is not more than four times the amount of equity. So if you want a loan for your business, make sure that there is enough equity in the company to leverage that loan.

Owners will be required to put some of their own money up when applying for a loan. This is where debt-to-equity ratio plays apart. Lenders will also evaluate a business on the following. Net worth, the amount of equity in a business, lenders usually require a second source of repayment.
Collateral is personal and business assets that can be sold if the business is not able to repay the loan. If the business has not acquired capital it will need a co-signer to obtain a loan. Collateral is an insurance policy that the lender will be able to get the money loaned back.

Collateral-coverage ratio is computed as part of the loan evaluation process. This ratio is calculated by dividing the value of the discounted collateral by the loan request.

Lenders will also evaluate the borrowers’ ability to run a business.  The banks will take into account past management experience, as well as education.  It is the banks job to protect their customer’s money.  That is why lenders dig into every aspect of the business, and the owner before issuing a loan.

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Crowd-sourcing for Funding

Crowd-sourcing is a way to fund a business without using traditional sources? Crowd-sourcing is the act of soliciting funding through large groups of people, usually done through social media groups. It is similar to flash-mob marketing.

Crowd-sourcing is an old funding concept, which has received a new name. Crowd-sourcing is the action of asking people to prepay for products so a business can create the product. Sites have been built to facilitate crowd-sourcing. Kick starter is probably the best known site for crowd-sourcing. In its simplest sense crown-sourcing is, outsourcing over a large group. This allows small contributions in high volumes to push new ideas. It is easier to ask for $5.00, compared to $500,000. Internet and social media has made it easy to obtain $5.00 from 100,000 people.
Is crowd-sourcing to fund a business a viable option? Research shows the crowd-funding industry has raised $2.7billion in 2012, across more than 1 million individual campaigns globally. In 2013 the industry is projected to grow to $5.1 billion. The use of crowd-sourcing will grow in the future.
The original crowd-sourcing model involved the entrepreneur going to the company, and convincing them to pay for a product prior to production. If a new business owner can successfully pull this off they are securing both funding, and a customer. These are two of the largest hurdles a new business will need to get over. Asking for payment before production is not an easy thing to accomplish. It takes a lot of trust from the purchaser to give money without a product to sell. If a business is going to make this happen, they will need a strong business plan to present to the buyer. This is the best form of crowd sourcing if it can be done. The problem is convincing a large crowd to trust a business is hard.

Donation funding is the most common model for crowd-sourcing. Donations to entrepreneurs was how current crowd-sourcing gained popularity. Groups of people with similar interests will fund a business. Seth Godin calls these niche groups tribes. Generally these tribes will only fund companies that are part of their society. Artistic products are most likely to find success in donation funding. Traditional production, and service oriented companies can still generate cash using donation funding. if a business is going to find success in donation funding it will have to connect with an audience. There will need to be something that will move people to donate to the start-up. Tom’s is an example of a company that has been able to bridge the gap.
Investment crowd-funding has become more popular, and will continue to grow. Attracting a large group of investors by offering stake in the company is the definition of investment crowd-funding. Unlike the donation model, financial crowd-funding is entered into by investors in an attempt to profit. This allows large capital investors to reduce risk, and lowers the barrier into capital investment. This will allow the average population to become Venture Capitalist, while increasing the amount of funds available to start-ups.

It is necessary to reflect on the negatives of investment crowd funding. Investment crowd-funding is the act of giving up partial control of a business. The owner must be willing to give up full control when they decide to use investment crowd-funding. A positive to using crowd-funding instead of traditional investment funding, is the spread of small shares will ensure that one person will not have a large control, which will be leveraged against the owner.

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Bootstrap Financing for Your Business

Bootstrap financing comes from the idea of pulling oneself up from the bootstraps. Bootstrap financing is defined as a business that Self-funds its costs. The company will grow as it creates revenue. The goal is to have a business that is self-sustaining. The objective of bootstrap funding is to keep costs low, and avoid debt. Businesses looking to use bootstrap financing to fund: need to be creative to keep costs low.

What are the benefits of bootstrap funding? The biggest advantage of bootstrap funding is avoiding debt. Companies in debt have to please lenders, making lenders the boss. Having debt causes owners to lose their independence, and creative freedom. If an owners’ goal is to live by their own rules, bootstrapping is worth considering.

Bootstrapping removes the distraction of debt, allowing Entrepreneurs to focus on customers. The purpose of a business is to solve a problem. It is impossible to fix customer’s problems, if your company has a bigger problem.

Taking out a loan allows for quick growth in the beginning stages, but can limit growth over time. A business needs quick, sustained growth to use debt as an advantage. This is hard for a small business to achieve. A poor position for a small business is, having to cut production, or close the business.

If an entrepreneurs plan is to start a business, and sell it for a profit bootstrap financing is a good option. A debt free business is more appealing to buyers than a business with debt. When sold a debt free business is pure profit.

Remaining debt free allows total control when negotiating the sale. If the owners plan is to grow a business, and sell for profit: Bootstrap financing is your best option.
Business risks are lower when a company is self-financed. If things go bad, the owner only loses what they put into the business. Zero is better than being negative. Losing savings is bad, but not losing a house is worse. Knowing that will reduce stress, and keep focus in the right places.
Bootstrap financing may be the wrong option for a business. The bootstrap method is only effective in niche or low cost markets. The competition and the owner’s personal-finances will determine if bootstrap funding can work.

To finance a start-up using the bootstrap method, the owner’s personal finances will need to be in good standing. Personal finances can stop any funding source. They become a bigger issue in self-funded businesses. It is impossible to self-fund a business without funds. While planning, a business must have the ability to fund operating needs.

Some businesses are better suited for bootstrap financing than others. If a business needs large amounts of cash, bootstrapping is out of the picture. This will include all businesses that need high sales volume. Production markets are bad places to try bootstrap financing. Few people can fund the costs of starting a manufacturing plant using personal-finances.
If survival is an owners’ reason for starting your business, it will be hard to self-fund. Many businesses begin as a way to fill the owner’s employment needs. If your motivation to start a business is preservation, time is your enemy. Bootstrap companies trade initial profit, for a self-sustaining company in the future. The Entrepreneurs’ personal stability, will determine if waiting is an option.

Competition will be a factor in deciding if bootstrap financing is an option. If you are trying to enter a market that is competitive, bootstrap financing will limit your ability to compete. You need to understand your limitations, when working on a small budget. Niche markets will be your market. Even in a niche markets, you will have to use superior quality as your advantage.
Being a bootstrap company limits growth in the beginning. To use this method, you will need patience. Opportunities will present themselves, and you will be unable to act.
Bootstrap financing limits strategic options available to start-ups. Bootstrap financing is a great option, but is has limitations. This model works best in market with weak competition, and low production costs.

More info: http://www.amazon.com/Understanding-Business-Loans-Grants-Michael-ebook/dp/B00OAUA4XE/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1414011056&sr=1-1&keywords=understanding+business+loans+and+grants