Funding Types – Key Differences Between Types of Funding
Funding & Investors. What are they? Funding & Investors are basically investment banks that provide loans to entrepreneurs, venture capitalists and individual entrepreneurs for the initial public offering of their business. These institutions are typically registered investment firms and are known as mortgage banks or mortgage investment banks. They also act as financial advisors for individuals looking to raise financing for their businesses.
In the case of an SBA backed business, funding can come from either the lender (usually a bank) or an investor. Private equity financing is becoming increasingly popular among small businesses and entrepreneurs as it allows them access to the private finances of larger corporations. In the case of an SBA backed business, this financing is called a commercial loan. Investors in the funding round up capital from individual investors, venture capitalists, banks, pension funds and wealthy individuals. Funding rounds are often used to raise financing for companies with less than perfect credit, businesses that are newly established and those that are considered unprofitable to invest in.
Angel investors are wealthy individuals who are willing to put their money into startup ventures. Angel investors work in groups and come up with initial seed money for a particular business. Once the company turns a profit, the group of angel investors will decide if they want to participate in capital funding for the business or if they want to receive a lump sum payment. Most angel investors focus on businesses that have strong potential.
Private Funding. Private funding can be received from a variety of sources such as family, friends and corporations. The most common source of private funding for start-ups is a personal savings account. However, there are also several other options including borrowing money from friends and business acquaintances and obtaining a small loan from a financial institution. Entrepreneurs should be sure to thoroughly examine any private funding source with a comparison of potential repayment terms before deciding on the funding source for their business.
Private Placements. Private placements occur when an investment bank, venture capital firm or private equity firm places a funding commitment with an accredited investor. The primary purpose of these placements is to provide an initial investment to a company, which is required to have a minimum of one percent equity. The secondary purpose is to provide additional funding for an existing business that has not proven profitable. An investment bank or venture capital firm will typically review the company’s business plan and financial statements as well as other information in order to determine if the investment will be a success. The investment banks and venture capital firms typically require the entrepreneur to submit their credit application along with their application for financing.
Seed Capital. Seed Capital is available only to start-ups that have not reached business valuation. Seed Capital is meant to assist with the growth and development of the business as well as provide short-term financing. Start-ups that use seed capital must typically repay the funds within one year.
