When starting a company, entrepreneurs dedicate a majority of their time securing the funding to make their vision a reality. This involves approaching investors and seeking loans that can allow them to launch operations and acquire resources. Funding may be provided by friends, family, venture capitalists, angel investors, banks and other sources.
What are the types of finance for entrepreneurs?
- Some types of finance entrepreneurs can pursue include angel investment, venture capital, financial bootstrapping, buyouts and loans.
Entrepreneurs must be flexible, savvy and fast-moving in order to acquire the financing needed to allow them to focus on scaling operations, hiring employees and propelling their business forward. Seeking out money in creative places must be second nature to build and maintain a successful business. Therefore, entrepreneurs should be prepared to explore funding opportunities via business angels, venture capital, bank loans, buyouts and financial bootstrapping.
Business angels, or angel investors, invest a part of their wealth in innovative companies in their earliest stages to help them grow expeditiously. Angel investments may provide a boon to an infant organization, with angels typically providing three times that of venture capital. Venture capital is a method in which investors fund a fast-growing company with the intention of selling their stake in the middle-stage. Venture capitalists take on high risks and expect high profitability when investing in new ventures. Bank loans are funding provided by a bank against business or personal credit. Financial bootstrapping is when a founder invests their own money and uses that to propel the business forwards, with methods such as joint utilization, sweat equity, owner financing, delayed payments, minimization of inventory and more to keep the business lean. Finally, buyouts exchange ownership of the company with another party in order to build its value. Buyouts can only occur once a company attains private status.
What is the difference between entrepreneurial finance and corporate finance?
- Entrepreneurial finance focuses on acquiring funding to kickstart a business. Corporate finance primarily focuses on increasing long-term value and maintaining entrepreneurial finance success.
Strictly speaking, corporate finance is a set of methods and strategies used to grow the long-term value of a company, encompassing methods such as capital structure, investment decisions, dividends, budgeting, and balancing equity and debt. While entrepreneurial finance may utilize many of these methods, the primary purpose of entrepreneurial finance is to gain additional funding and maximize profits, meaning that some of the analysis that is applied to corporate finance may not be applicable here. For example, entrepreneurs are often willing to acquire additional debt in order to increase their available funding while larger corporations will look to invest in other smaller companies to increase product offerings or value to shareholders. However, it is important to note that a startup's corporate finance department will often lead all entrepreneurial financing responsibilities.
Additionally, many professionals who specialize in entrepreneurial finance often work for venture capitalists and investment funds directly to provide expertise in how organizations plan to attain funding and become profitable.
What financial skills does an entrepreneur need?
- Entrepreneurs must understand skills like credit, budgeting, effective spending, responsible borrowing and investing to grow a business.
In order to successfully grow any business, entrepreneurs must possess a strong financial skill set in order to convince investors to provide funding and transform that funding into tangible growth. Understanding how a credit rating will determine loan eligibility is a huge skill to have, especially when starting a business, as it may be one of the few sources of funding available in the early stages. Along with understanding credit, responsible borrowing is necessary so debt can be manageable once growth begins. Next, finding investors and having the skills to communicate the company’s vision is key to any growth-stage business. Finally, knowing how to budget and spending money wisely is critical to the success of a business in both the short and long term.