External Financing Options for Entrepreneurs

When more capital is required to start and operate a business than business owners can put forth, entrepreneurs must be aware of their external financing options. Below, our accountants list some of the various options for funding your entrepreneurial enterprise.

External Financing Options:

• Angel Investors
  • Provide capital in exchange for convertible bonds
  • The holder’s investment converts into a specified number of shares in the company they have provided capital to
  • Alternatively, both parties may negotiate a loan repayment in cash that is of equal value to the original investment
    • This option is good for companies lacking credit with high growth potential
• Venture Capital
  • Investors will own equity in the company that they invest in (i.e. they pay cash for a certain percentage of shares).
    • This ownership is considered private equity and it is not established within the public market
  • Popular for enterprises that sell novel products, technologies or services
  • The investor is reimbursed through capital from a stock market launch (IPO: Initial public offering) where the company is sold to the general public, transitioning from private to public
    • Alternatively, the investor may receive repayment at the occurrence of a private sale/merger of the company
• Crowdfunding
  • Collection of financial support from backers
  • May occur on a digital platform
  • Entrepreneurs will have to develop a case for support and present it to a mass audience and then continue to promote and encourage sponsorship
  • Types:
    • Not-for-profit (raise funds for a specific campaign)
    • Political (support a party)
    • Charitable (emergency relief)
    • Commercial (to facilitate the creation and sale of a new product)
    • Financing a startup enterprise
• Hedge Fund
  • Established by sophisticated investors and managed by private firms
  • May not be accessible to a wide range of start-ups/entrepreneurs because, typically, leveraging these funds requires a significant upfront investment
    • However, if an investor has access to a hedge fund they can use this pool of money to assist a promising entrepreneur
• Government grants and financing
  • Public funds may be available to facilitate the start-up of your business
  • Depending on your eligibility, you may earn grants, financial assistance and loans from various government institutions
  • You will have to repay some of these options, but others will be gifted based upon your enterprise’s ability to align with explicit criteria
  • Oftentimes, the recipients of government funding have to fulfill strict application requirements and report on the use of the funding as it is used
• How to get external financial support
  • Generate sound financial reports
  • Prove your earning potential with extensive research and financial projections
  • Highlight your unique selling features
  • Choose an investor that understands, supports and aligns with your vision
• Risks of External Financing Options for Entrepreneurs
  • Companies will need to generate sufficient income to repay their investor, if a cash value repayment option is agreed upon
  • Depending on the size of the investment, investors may have enough shares to influence how the company operates moving forward
    • It may be wise to take multiple, smaller investments from more than one investor to avoid creating majority shareholders
    • Clearly articulate in writing exactly what your investors will have a say in and which elements of the business will remain off of the table

Understand how external financial support will affect your business. Familiarize yourself with your financial health, then choose the most viable option for securing the financial stability of your enterprise. If you are an entrepreneur looking to take your promising enterprise to the next step, contact Hogg, Shain & Scheck to better understand various financing options.