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| All business ventures require capital. While capital is needed throughout the life of a business, the new entrepreneur faces significant difficulties in acquiring capital at start-up. Before seeking outside financing, an entrepreneur should first explore all methods of internal financing, such as using profits, selling unused assets, reducing working capital, obtaining credit from suppliers, and collecting accounts receivable promptly. After all internal sources have been exhausted, the entrepreneur may find it necessary to seek additional funds through external financing. External financing can be in the form of debt or equity. When considering external financing, the entrepreneur needs to consider the length of time, cost, and amount of control of each alternative financial arrangement.
Commercial bank loans are the most frequently used source of short-term external debt financing. This source of funding requires collateral, which may be asset-based or may take the form of cash flow financing. In either case, banks tend to be cautious about lending and carefully weigh the five Cs: character, capacity, capital, collateral, and condition. Not every entrepreneur will qualify under the bank's careful scrutiny. When this occurs, an alternative for an entrepreneur is the Small Business Administration Guaranty Loan. The SBA guarantees 80 percent of the loan, allowing banks to lend money to businesses that might otherwise be refused. A special method of raising capital for high-technology firms is a research and development (R&D) limited partnership. A contract is formed between a sponsoring company and a limited partnership. The partnership bears the risk of the research, receiving some tax advantages and sharing in future profits, including a fee to use the research in developing any future products. The entrepreneur has the advantage of acquiring needed funds for a minimum amount of equity dilution while reducing his or her own risk in the venture. However, setting up an R&D limited partnership is expensive, and the time factor (at least six months) may be too long for some ventures. Restrictions placed on the technology as well as the complexities of exiting the partnership need careful evaluation.Government grants are another alternative available to small businesses through the SBIR program. Businesses can apply for grants from 11 agencies. Phase I awards carry a stipend of up to $50,000 for six months of initial research. The most promising Phase I projects may qualify for Phase II support of up to $500,000 for 24 months of research. Finally, the entrepreneur can seek private funding. Individual investors frequently require an equity position in the company and some degree of control. A less expensive and less complicated alternative to a public offering of stock is a private offering. By following the procedures of Regulation D and three of its specific rules—504, 505, and 506—an entrepreneur can sell private securities. When making a private offering, the entrepreneur must exercise care in accurately disclosing information and adhering precisely to the requirements of the SEC. Securities violations can lead to lawsuits against individuals as well as the corporation.The entrepreneur needs to consider all possible sources of capital and select the one that will provide the needed funds with minimal cost and loss of control. Usually, different sources of funds are used at various stages in the growth and development of the venture, as occurred in the case of Walt Disney, a successful entrepreneur indeed. |