of funding 1: Venture Capitalists.
A venture capitalist is an
investor who gives a small amount of money to small or growing businesses to help
them start-up properly. Venture capitalists are willing to invest in companies
because they can earn a huge return for their investments if these companies
are a success. Venture capitalists
can also experience very major losses when the companies they invest in fail,
but these investors are often so wealthy that they can afford to take the risks
within the funding of young, unproven companies that show that they have a
great idea and a great management team. Venture capitalists mainly look for
strong management teams, a large potential market and a very unique or
demanding product, or service with a strong advantage. They also look for
opportunities in industries that they are familiar with, and they look for the
chance to own a large percentage of the company so that they can influence its
decisions. The venture capitalist usually takes a big share of the company and
also a large share of the company’s profits. But if they fail then they too
also have to pay for the loss as they share part of the business. An example of
a venture capitalist firm is Global Founders Capital (www.globalfounders.vc). They
are global investors that have a track record of building billion dollar
businesses around the globe including platforms like, Facebook, LinkedIn, etc.
they have major offices in Europe, Asia, Latin America and USA.
of funding 2: Bank Loans.
loan is a fixed amount for a fixed date with regular fixed
repayments. The interest on a loan tends to be lower than an overdraft. The interest
rate is usually 2%-5% Apr and the period in which the payment is to be paid is
often 3-10 years. However, a bank loan doesn’t provide more flexibility than a
bank overdraft. The business commits to meeting the bank loan repayments and
interest otherwise the interest would increase the interest amount, you may
have to pay a fee around £30, depending on the amount you loaned, and the
lender can also report you to credit reference agencies for your missed
payments. An example of a loan is: A business borrows £40,000 for 36 months
(3yrs) at an interest rate of 73% APR representative. This means that the total
amount to be repaid is £44,506.80. You would then have to pay £1,236.30 every
of funding 3: Bank Overdrafts.
A loan arrangement in
which a bank extends your credit up to a maximum amount which is called an
overdraft limit. A current account customer can write cheques or make
withdrawals. The most common form of business borrowing, an overdraft is a type
of revolving loan where deposits are available for re-borrowing, and interest
is charged only on your balance goes below zero, this is an overdraft. It is a
demand loan; the loan can be cancelled at any time by the lender at its
discretion, without any warning notice or explanation. If the overdraft is secured
by an asset or property, the lender has the right to access savings accounts or
take you to court in the case that the account holder does not pay. For
example, you might go to a tech shop and want to spend £8,000 on 2 T.Vs, a
sound system, a projector, and a gold plated smartwatch, but you only have
£2,000 in your account, you would be allowed to go a certain amount below zero.
If your balance goes to £-6,000 you
might have to pay the bank back at an interest rate of their choice.
of funding 4: Personal savings.
Money that someone has put away for non-immediate use. For example, you might use personal savings to save up for an expensive purchase such as a house or a car. In general, it is recommended for one to maintain personal savings to cover three to six months of living expenses, but in the matter of
business, it is recommended to save up money before starting a business. This
is so that if anything goes wrong or you are not making the profit you like or
the business is failing, then at the very least you have money saved up to help
you carry on with life/to try something new, or carry on trying to make the
business a success.
compare these 4 sources of funding, identifying the strengths (positives) and
weaknesses (negatives) of each one.
If you are aiming to
achieve a higher grade for this Assessment, you might also wish to identify which
source of funding would be most appropriate for your own business enterprise
project, giving reasons for your answer.
Advantages: The main advantage of venture capital from the view of a business, is
that it can give you a source of financing to facilitate rapid growth. For
instance, if you have an amazing, unique business idea but just you don’t have
enough money to bring it to the market by yourself before other
competitors/inventors/enemies enter the market, venture capital can allow you
to quickly create and expand the business, gaining brand recognition before
competitors enter the market as well.
Disadvantages: Venture capital investments
involve giving away a share of the ownership of the business in return for the
investment. When the business owner accepts venture capital, he/she is no
longer the only owner of the business, they must give some share of ownership
of the business to the investor as well as a share of the profits, and losses
if there are any. This means that the business does not have to pay back the
venture capital as it is technically a trade, but the original business owner
loses 100% control over the company. Venture capital investors will have a say
in management decisions and may attempt to push the company toward rapid
expansion and an exit from the market either by being acquired by a larger
company or through an initial public offering.
the only thing you need to worry about is making
your regular instalment payments on time. You must pay the full amount when the
bank demands it so there are no alterations to be concerned about. Another
advantage is that banks don’t monitor how you use your loan, as long as you
make your payments on time, so you can invest it however you want. Another advantage,
is that it’s cost effective. The interest rate is very low at a maximum of
around 8%. Also, the interest you pay on the loan is a tax deductible expense.
Disadvantages: The payments must be paid on
time, not a day late otherwise you have to pay a fee or you can even have your
assets seized. It can be difficult to obtain a loan if you don’t have any
assets. If you get a loan with a variable interest rate, the interest changes
with the market conditions. This can stop you from making your own financial
plans for the near future.
Advantages: It helps to keep a good
payment history as any of the payments made with a cheque does not bounce
because of insufficient funds. It also
helps in ensuring that payments are made and no late payments penalties are
faced, as payments would be made even if there is no balance in the account. Because the interest is calculated on the amount of
money used, you can save a great amount in interest costs as a normal loan is
taken on a fixed interest rate. In other loans, you have to pay interest even if
you are not using the money. An overdraft is flexible in the sense that you can
take it whenever required for whatever amount (up to the limit given) and for
even as less as one or two days. Disadvantages:
Overdraft have a higher interest rate than normal loans, the interest rate
usually 8%-15%. Also if you exceed your overdraft limit, the fee/charges you
have to pay/face will be a lot worse/higher. Your assets can be seized if not
secured but only under the circumstance that you don’t make you payments. The
bank however, can cancel the overdraft at any time, without any notice any
without any reason whatsoever.
Advantages: You will know
exactly how much money you have available to rum/start your business and won’t
have to spend time securing assets and finding less reliable sources of funding
from investors or banks. You will also keep full ownership of the business as
there won’t be people investing and wanted share capital. Funding yourself
means that u will live under your boundaries and under your rules/expectations.
You will also know where exactly your budget is to be spent.
Disadvantages: Using your own money to fund your business can put a strain on your
family/personal life. You might not have enough money remaining to cover your
If you fund your business yourself, you will have to
find/keep your own contacts and mentors.
In my opinion I believe
that a bank loan is the best source of funding, for a small business, is a bank
loan. I think this because it is something easy to get, and the interest rate
is much lower than an overdraft for example. The only major worry you have is
to make you payments on time, otherwise this could lead to a fee/fees or even
having your assets seized. Another reason this source is better than, for example,
having a venture capitalist invest in your company, is that the lender (the
bank) doesn’t gain any share capital of the company. They will have no say in
your decisions and will not receive any percent of the profit. Another plus to
bank loans are that you can use your money however you may please. This could
be on equipment or staff or just silly things that you like. The banks don’t monitor
how or where you spend the money or even how much you spend in one go.