Capital & Funding
There are three basic types of business capital, or financing, for an enterprise: non-repayment, debt, and equity.
Non-repayment financing can come from several sources; however, it typically comes from one of three main places: (1) personal wealth; (2) grants or gifts (a.k.a. “free” money); or (3) an organization’s revenue. Free money is the most desirable of non-repayment capital because there are “no strings attached.” Grants, prizes, and/or gifts are given to an individual or an organization with no expectation of anything in return. On the other hand, if an organization sells its products and/or services and generates revenue, this revenue can be used to finance the operations of the entity. Over the long-term, an organization that is generating revenue greater than its expenditures is ideal.
Debt capital is provided to an organization in exchange for a promise to pay back the loan amount. The underlying premise of debt financing is that you need to have something in your possession now (revenue, assets, personal wealth) to underwrite the amount provided. More to the point, the provider of the money wants to know how they will be repaid from what you have, not from what you might have in the future. The most common means for this type of financing are loans, lines of credit, and strategic partners. In addition to repaying the amount borrowed, borrowers are charged an additional amount above and beyond the borrowed amount in either fees and/or interest. The magnitude of these charges help to categorize debt financiers into four types: (1) conventional providers such as banks and savings & loans; (2) second-tier providers who loan money similar to banks but who also charge a fee); (3) factoring providers who loan money for short periods of time at an inflated interest rate and often charge fees on top of that; and (4) government providers who offer loan programs from government bodies or institutions through conventional lenders. Government programs, like SBA loans, take less risk but offer the best rates, while factoring firms charge extreme premiums because they take more risk. The focus of all debt lenders is payback, not earnings potential.
Equity capital is money that is provided to an individual or an organization in exchange for ownership in an entity. Contrary to debt financing, equity investment is predicated on the potential earning power of the entity, not merely its current assets. Equity providers hope to use the funds invested to rapidly grow and expand the enterprise. Typically, the providers of this type of capital determine a value for the entity and acquire a percentage interest in the enterprise based on the amount of their investment. The goal for an equity investor is to find a means to exit the investment and reap the difference between the original value of the entity and the exit value (a.k.a. return on investment). The typical sources of equity capital include friends, family, and founders, angel investors, venture capital firms, and/or strategic partners. Like debt providers, the terms of an equity deal are tied to the risk of the venture and each entity has its own parameters for determining whether it will provide funding to an enterprise. Formal equity capital organizations are interested in the next set of equity investors in the company; not the long-term earnings power of the company. A typical equity funded enterprise will turn-over three different sets of investors before they reach a sustainable enterprise status.
Given that these are the only sources of capital to fund an organization, how do you determine which one is the right one for you? Well, it depends. GLIDE’s unique approach considers several factors: how much money you need; your long-term vision for the business; your current method of funding; your personal interaction with the entity; and the entity’s current level of development.
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