In building a business, many startup or company struggle in finding investment or capital. In the beginning all is done by bootstrapping- Bootstrapping is one’s way in using existing resources (funds, assets and on). Along the way due to the dreams of silicon valley, and others, startup founders looses their footing in what’s importance. The building of the company is made for exit only and as a result the business is not taken care for.
Getting investment is crucial but getting investment shall not be the end goal. Expansion of the business shall be the goal – or to be specific any kind of business related goals.
We all have heard the terms of capital market before- public offering, as a way to obtain funding. Let’s take a step back to understand the financing types and perspectives.
Financing in the Company can be obtained by ways of loan and equity participation- both are investment by investors. However the implementation and implications are different, loan is the type where a fund is advanced to the company by a third party, may be banks, a third party investor, or family and friends. Our next post will be discussing a detailed important aspect on loan.
Equity participation, is a term referring to a third party participating as a shareholder or stakeholder to the company ( the terms of stakeholder may be also used for the lender –whoever has interest in the company). Public offering, is a way of a company to raise the capital. Generally the strategy is to offer a certain amount of stake or shares in the company to a third party (if the shareholder refuses to inject capital any further), warrants, rights to order shares, wessel, and other type of negotiable instruments. Other than this , crowdfunding is also another way to raise fund, as part of the equity participation.
In both option, both considered to be a financing in the company, however some old school concept would prefer to actually apply for loan rather than to bring more equity participant- the concept is that they want to hold 100% control and consider that all of it to be owned by themselves. However, this kind of concept is misleading, in loan, some might provide a short term loan without any security, some family and friend might provide interest free short term loan and this is the most beautiful terms ever. In reality failure to pay the loan might causes you to loose your own stake.
The best way for financing is negotiating the terms with the related investor, while applying loan to the bank might be considered the safest way for some but not all have the same opportunity to apply loan to the banks considering the requirement, security and also the interest rate.