Join Eddie Davila for an in-depth discussion in this video Raising capital, part of Business Foundations.
- Knowing how much money is needed to launch a business, a product, or an initiative is difficult, but once you have a number, it's time to find the funding. Perhaps your company has the extra cash lying around. Even then though, you'll need to show your plan and projections to the finance department and hope they think that your idea is worth investing in. If your idea looks like it'll get the company the best return on investment, great. But for many of us, getting the money will not be that easy.
So, let's look at some options for borrowing the money. This is called debt financing. Common types of debt financing include loans and bonds. A loan is a transaction where a borrower gets money from a lender and agrees to repay the money in a certain amount of time. Sometimes weeks, sometimes months, and sometimes over many years. The lender could be a bank, a friend, a family member, or even a credit card company.
Why does the lender give the money to the borrower? Well, the lender expects to make money by getting interest on the loan, and in the case of a secured loan, if the borrower does not pay back the money, the lender can take assets from the borrower as payback. If your company gets a loan, you're taking on certain risks. You must be ready to pay back the loan or make periodic payments when the loan comes due. Not paying back the loan in time could bring penalty fees, result in the loss of company assets, it could hurt your credit rating, and if you're borrowing from friends and family, you risk damaging the relationship.
In some cases though, companies could issue bonds. Bonds are essentially small-scale loans from investors. So, if you buy a $500 bond from Coca-Cola, you are loaning them $500. In return, they will make payments to you just like you are a bank, and just like a bank, they will pay you interest. Coca-Cola can probably issue a low-interest bond and raise a lot of money.
On the other hand, a startup might have to pay a high-interest rate and even then, they might have trouble getting the money they need. How about if we don't want to borrow the money? What could we give investors instead of interest payments? We could give them a stake in the company. Big corporations can issue stock. Each share of stock might be sold for $100. The company gets the $100 to invest in new ventures. The owner of the stock now owns a very small percentage of the company.
How small? Well, some companies have millions or even billions of shares. But suppose a company sells even just one million shares. The company might be able to raise tens or even hundreds of millions of dollars very quickly. Small private companies though, might look to venture capitalists. These folks will give you money, but they'll want ownership in return. For example, you might sell them 25% of the company for a 5 million dollar cash investment.
The company now has 5 million dollars in cash, but in return, the investor will demand you grow the company such that their 25% stake in the company will grow as the company grows. Then again, some entrepreneurs raise money by selling parts of the company to friends and family. Again, this is very risky. They now feel entitled to manage the company, or perhaps ask for their money back if they don't agree with your management.
Loans, bonds, and equity investments are sort of classic ways companies raise money, but nowadays, we also have crowdsourcing money online, business competitions where startups present their ideas and judges award funds to one or more companies. Companies may also seek grants or gifts from the government or charitable organizations. Often, this type of financing is available to companies that are either owned by or serve underprivileged or under-represented groups.
Look, raising money is not easy and often, it's not risk-free. So, understand your needs and understand the trade-offs, so you can explore the financing opportunities that are best for your company.
He also reviews the basics of the people side of business: managing employees and developing customer relationships. Last, he covers the financial and information management aspects of business and provides a basic explanation of economics, so that you can understand the relationship of your business to the bigger picture.
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- Understanding business goals, stakeholders, and resources
- Developing a product or service
- Selling a product or service
- Raising capital
- Managing employees
- Managing customer data
- Understanding finances
- Managing resources
- Understanding economics