How to Raise Finance for Business

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Venture Capital

Venture capitalist usually a professional investor, often another company, interested in high growth, high risk business, who will invest an amount into a business in return for shares, and an expectation for a high return.

Venture capital is a source of finance that is provided to the business that guarantees long term share capital.

Venture capital is provided by private investors to start up and expanding businesses.

In exchange for the capital, a private investor receives a share of the business.

In addition, the investor receives a return on the investment (ROI) that depends on profit from the growth of the business.

Venture capitalists tend to have a major influence in the business. Due to the amount of investment which they put in, they may become very controlling.

The business owner needs to weigh this factor when bringing venture capitalists is the percentage of profit demanded by the venture capitalist.

The greater the venture capital invested, the higher the expectations on return on investment. They can ultimately control the company.

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Bank Loans and Overdrafts

A bank loan is taken out by a business to finance the activities of the business. It borrows a specified sum of money from the bank and repays it in instalment over a period of time.

The bank charges an interest on this loan and will often require collateral to secure the loan, in the event of failure to repay the loan. 

Longer term loans have higher interests on them.

Bank overdrafts are available to businesses and enable them to spend money over the actual amount which they have in the acount.

The overdraft is a set limit and that is the maximum the business can withdraw from its bank account for its business activities.

Businesses should endeavour to make sure it can meet the regular repayments. The interests on loans can prove to be expensive for business.

This also is applicable to overdrafts which need to be agreed with the bank. Overdrafts usually attract a high rate of interest especially if it's an unauthorised overdraft. Many perfectly good businesses fail because they don't manage their cash flow effectively.

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Personal Sources

Small businesses tend to invest their personal funds into the business.

It could be personal savings, inherited funds, selling of personal assets and even taking out personal bank loans.

This is because they want the business to survive and grow.

It's quite challenging for a small business to get credit for financing it, hence the reliance on personal funds.

The ultimate risk is that any business can fail and the owner loses their personal assets.

Incorporated is the process of forming a limited liability company. The process involves creating a separate legal identity for the business, and the creation of shares, or equity.

A business angel is a wealthy, entrepreneurial individual willing to invest in a small, high risk business who expects a high return. The business is likely to have a high growth potential.

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Ordinary Share Capital

Limited companies issue shares to investors as a means of raising capital. In return, the investors get to own a portion of the company which is equivalent to the amount of shares purchased. The business uses flotation of shares to make its shares available to the general public for sale.

There are two types of shares: Ordinary share which is sold to the investor who in return receives a portion of the profits that the company makes. This is given in the form of a dividend with changes annually to reflect the performance of the business.

Preference share which are paid out to preferential investors at a fixed dividend rate, regardless of the performance of the business. The preferential shareholders always get paid out before the ordinary shareholders.

Issuing ordinary shares tends to reduce the power of ownership of the original owners of the business. The more shares are sold, investors but more of the business. Therefore, there will be criticisms and sometimes a loss of original business focus, in order to implement the desires of the shareholders.Unless the business owners retain 51% of the business, they could risk losing control of the business to shareholders.

Businesses can acquire finance through internal or external sources. Internal sources include retained profits and the owners funds. External sources include mortgages, hire purchases.

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