Financing Sources for New Ventures

Financing Sources for New Ventures

• Bootstrap financing relies on the entrepreneur's own resources, friends, and family, avoiding external investor assessments.
• Common bootstrap resources include personal savings (90%), credit cards/personal loans (28%), loans from family and friends (7%), and equity investment from family and friends (5%).

Angel Investors

• Angel investors are individuals who invest smaller amounts ($25,000 - $500,000) in early-stage ventures.
• They often possess significant industry experience, are willing to invest over long periods, and may take an active role in the business.

Venture Capital

• Venture capital (VC) is organized as limited partnerships consisting of limited partners (LPs) who provide capital and general partners (GPs) who manage investments.
• VC funds target high-risk ventures with the potential for large returns, focusing on equity investments.

Asset-Based Lending

• Asset-based lenders, or secured lenders, provide debt capital to ventures that have collateralizable assets.
• They rely more on the liquidation of business assets than on cash flow for debt servicing, with the U.S. market estimated at $590 billion in 2008.

Venture Leasing

• Entrepreneurs can lease essential tangible assets instead of purchasing them, often benefiting from tax advantages.
• The lessor's return might be linked to the venture's financial performance.

Corporate Venturing

• Corporate venturing can be internally or externally managed, depending on the company's innovation strategy.
• Internally managed investments seek to keep valuable ideas within the company, while externally managed focuses on either financial returns or strategic interests.

Government Programs

• Various government programs support small business growth, including loan guarantees and innovation grants.
• The U.S. Small Business Administration (SBA) facilitates programs such as Small Business Investment Companies (SBIC) and the Small Business Innovation Research Program (SBIR).

Trade Credit

• Trade credit, or vendor financing, occurs when suppliers offer payment terms for purchases, becoming a vital source of short-term financing.
• It is particularly crucial in emerging economies where risk capital is less accessible.

Factoring

• Factoring involves selling accounts receivable to a factor, who then manages the collection process.
• There are two types of factoring: with recourse (where the seller retains some risk) and without recourse (where the factor assumes full risk).