Finding the capital you need to help your private business grow
As your private business grows, your capital needs will evolve. Whether it s introducing new products or services, expanding into new markets, requiring additional people or equipment or considering an international expansion, you ll need to seek out ways to raise new capital to grow your business. Here s a quick snapshot of some of the pros and cons of seeking funding sources for your business expansion:
Bank loan The most common form of loan capital for a business, a bank loan provides medium or long-term financing. The bank sets the fixed period over which the loan is provided, the rate of interest and the timing and amount of repayments. Pros You don t have to give the bank a percentage of the company s profits or shares. Bank personnel don t get involved in any aspect of running your business. Interest rates may be fixed for the term so you ll know the level of repayments throughout the life of the loan. Once you ve paid off the loan, there s no more obligation to or involvement with the bank. Cons You could be paying a fee on funds you don t need to borrow. Some type of collateral must be used to secure the loan usually a general security agreement over the assets of the business as well as a lien on the vehicle, equipment or real estate being purchased and sometimes a personal guarantee by the shareholders. Loans will have certain terms and conditions that you must adhere to.
Venture capital Venture capital is money provided by investors to startup firms and businesses with perceived long-term growth potential. It typically entails higher risk for the investor, but it has the potential for above-average returns. Pros Great source of funding for startup companies that have proven their model, with the potential for growth. Venture capitalists usually look to enter into long-term investment situations. Unlike with a bank loan, you have no obligation to repay venture capital funds prior to a liquidating event. Venture capitalists can connect you to other business leaders who can help you grow your business. Cons Venture capital firms typically require an equity interest in exchange for their investment. Venture capitalists often have significant involvement in the operation and growth of your company due to the nature of their monetary contributions. Typically require a higher rate of return on investment. Venture capitalists will want to secure significant representation on your advisory board.
Angel investors An angel investor is an investor who provides financial backing for small startups or entrepreneurs. The capital they provide can be a one-time injection of seed money or ongoing support to carry the company through difficult times. Pros Angel investors have different investment criteria as compared to more traditional lenders due to the infancy of the companies they invest in. They look for companies they believe can be successful but may not have a proven track record. As the companies are often in their infancy the structure of the deal can be negotiated to a greater extent than more formal sources of capital. You can gain a mentor and industry expert who can help guide you along your entrepreneurial journey. Cons In exchange for providing startup capital, many angel investors require an equity interest in exchange for their investment. Angel investors will expect a larger return on their investment upon a liquidating event. Typically they ll want to secure significant representation on your advisor board. You ll need to be fully comfortable with having the angel investor play an active role in your business and be open to their expertise.
Crowdfunding Through various social media sites, entrepreneurs and owners seek investors beyond friends, family or other financing alternatives. Pros Helps generate awareness and interest in new business ideas by testing them in the public realm. Can offer a fast way to raise financing. Small upfront fees. Investors can track your progress and may help you promote your brand through their networks. Provides alternative option for businesses that struggle to get bank loans or conventional funding. Cons If you haven t protected your business idea with a patent or copyright, someone could potentially visit the crowdfunding site and duplicate your concept. If you don t reach your funding target, any financing that s been pledged will be returned to investors. Crowdfunding isn t the best option for complex projects as it works best if the business idea is simple. May not be the best option for large capital requirements, as crowdfunding is oftentimes for projects under 100K.
Let s explore the funding options that can help you grow your business. Contact EY s Private Mid-Market team at privatecompanyinfo@ca.ey.com. Visit us at: ey.com/ca/pmm.
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