Sources of funding
Setting up new venture requires funding from different source for inventory, working capital, to buy equipments, etc. The sources available for funding a new venture are: personal capital, funds from friends and family, loans from banks, venture capitalist, angel investors and government.
Personal capital would be the wealth owned by the entrepreneur, this is the best option as the entrepreneur will not be dependant or answerable to anyone else. Second most beneficial option is getting funds from family members and close friends. They generally are less interested in the returns of the business and purpose is to help out grow. Option of acquiring loans from banks is always available but is not preferred much by such companies mainly because it reduces their return on investment (ROI) due to interest payments. Moreover, banks conduct extensive inquiries before providing loan and check the credit ratings. Plus interest payments become an obligatory task for entrepreneur even in hard times (Scribd, 2010). Another option is acquiring funds from venture capitalists who are in search of businesses with high potential and their focus is mainly on future growth and ROI (Scribd, 2010). Angel investors are another option to get funds from; they are the wealthy people willing to take high risks (Reference for Business, 2010). Moreover, government programs for small business can be a good source of funds. Among all of them personal capital and funds from friends and family members are the best source to start with. Besides this venture capitalist funding is all beneficial as they provide advisory services also regarding the business therefore entrepreneur gets a helping hand also.
Capital structure
A new business needs to determine its capital structure depending on their future plans. Initially generally it’s feasible to have higher equity to debt ratio that is more equity should be invested by the owner to attract financing. This form of equity investment can be attained through personal funds, capital from friends and family members and other than this equity investment can be acquired from venture capitalist too who are willing to lend for longer tenure but only in high potential businesses. However, the above argument does not indicate that no debt should be incorporated in the business, a proportion of loan from banks and Small Business Administration (SBA) should also be incorporated in the business. Debt is an important aspect in the business because equity financing means more investors are entitled for decision making thus the greater the number of investors the more chances of difference in opinion thus borrowed money in form loan can reduce this problem (Martinovic, 2010).
Apart from this the capital structure is dependent on the future goals that is if the business plans to set up a new facility of which return is uncertain then equity funding is more feasible but if funding is required for short term to upgrade technology or so then debt is a better option (Martinovic, 2010). Thus it’s determined that initially new venture should have high equity as to debt and as the business grows on it should increase debt and reduce equity to gain control.
Government grants
The grants provided by the government are basically free money that is it is not needed to be returned back. For a new venture it is one of the most beneficial sources of funding as it increases equity investment in capital structure and money is not needed to be paid back. This increment in equity portion of capital structure will help in attracting financing in form of loans. Moreover, acquiring government grant means that strict vigilance is being kept on the business thus chances of making errors are reduced and efficiency increases (Jamie, 2010).
New venture going public
The new venture generally opts for other sources to acquire funds for growing phase of their business. Even though going public make the availability of capital easier and makes expansion possible but this has a disadvantage of sharing profits with the investors.
However, companies use going public as their exit strategy and thus it’s not suitable for new ventures to raise funds through this method. Moreover, once a company plans to get listed it usually need to highlight the attractive areas of the business and plus investors are also interested in the past record regarding the earnings of the company therefore, less chances of a venture being successful in capturing investors interest due to lack of past experience and expertise.
Breakeven Point
Break even is a point where a company does not make either profit or loss and is basically highlight the amount or unit of sales required to cover the fixed costs of the business. Thus higher the fixed cost more sales will be needed to cover that.
It’s difficult for a new venture to achieve break even in first few months as generally it takes time to attain economies of scale which can help in achieving breakeven point for the company. Yet the venture needs to analyze the sales pattern of competitors to forecast the businesses sales which will help in identifying the time period to attain breakeven.
However, in deciding the breakeven point it’s important to know the products being sold by the company as in case of necessary items or something not too luxurious should make it easier and quicker to achieve breakeven for the business and vice versa for technical or luxurious products.
References
- Jamie, K. (2010). Business Government Grants – Pros and Cons.
- Martinovic, S. (2010). Determining the Proper Capital Structure for a Business.
- Reference for Business. (2010). “Angel” Investors. Web.
- Sharma, N., Dhupar, N., Mittal, N., Rawat, P. & Ghildiyal, P. (2010, April 08). Venture Capital.