Business Angels - Sources of financing

COMPANY FINANCING SOURCES

The first step towards building a strong company is to have a good idea, a differentiator and a goal-oriented team. Based on this the business team establishes a clear vision, mission, values and both short- and long-term objectives. We define that in the business plan and while writing this document also check, whether our business idea has indeed the potential we believed it to have. Should the potential prove itself as real, it is of course sensible to establish a company and embark on the business adventure.

A very important part is however still missing in the whole business picture, and that part is the financing of the company. Usually the entrepreneur does not have enough means to finance the growth of his company throughout specific phases on his own. Therefore certain financial mechanisms have developed, which help the entrepreneur to finance the start-up, growth and expansion. We divide sources of financing into two categories: debt and proprietorial financing.

The most common debt financing sources are loans, leasings and other types of loans. When it comes to such financing sources we pay a certain amount of interest on the borrowed money and also repay the principal. Debt financing sources are however relatively hard to get (or practically impossible) if we have just established a company. Aside that we always have to guarantee with the company’s resources or personal means, a warrantor may also be required. Institutions offering debt financing sources therefore insure themselves very well, that they receive the lent money back together with the desired interest.

On the other hand we have proprietorial financing sources. These financing sources fill the gap which has emerged to high risks. The essence of proprietorial financing sources is not to repay the money with interest, but at a certain point through recapitalization accept the new owner into the company, when the ownership changes again, we then return the money with interest. Besides a new owner in the company we gain other forms of added value, knowledge, experience and social networks. Such financing is especially suited for fast-growing companies in initial growth stages. The most common types of such financing are business angels and risky capital funds.

Irrespective of different sources the entrepreneur has to collect enough money at the start in order to establish his/her company, gets a working prototype and his/her first clients, with which he executes a pilot project. Only after that it is sensible to seek investment from business angels and venture capital funds. We can therefore define another type of sources, which are usually proprietorial, which are 4F – founders, friends, family and fools. These are the first sources which need to be impressed by the entrepreneur’s belief in his/her idea.

Of course different financing sources have different characteristics:

The entrepreneur must ensure an optimal financing of the company through the company’s growth by choosing the optimal combination of both sources. In the initial phases are, as already mentioned, proprietorial sources more appropriate, which later on must be combined also with debt sources.