COVID 19: SECRETS OF FINANCING YOUR BUSINESS FROM START TO EXPANSION

Building a business requires capital and unless you have enough money in savings to bootstrap your business, you will need some form of financing to grow your company and achieve your goals.
To raise capital for business needs, companies primarily have two types of financing as an option: equity financing and debt financing. Most companies use a combination of debt and equity financing, but there are some distinct advantages to both.

EQUITY FINANCING
Equity financing involves selling a portion of a company’s equity in return for capital.
Equity financing means selling a stake in your company to investors who hope to share in the future profits of your business.
It entails trading capital for ownership.

ADVANTAGES OF EQUITY FINANCING
The main advantage of equity financing is that there is no obligation to repay the money acquired through it.
There are no required payments or interest charges.

DISADVANTAGES OF EQUITY FINANCING
To convince an investor to invest, entrepreneurs need solid financials, some semblance of a working product or service, and a qualified management team.
Investors are difficult to find especially for new business owners.
In order to gain funding, you will have to give the investor a percentage of your company.
You will have to share your profits and consult with your new partners any time you make decisions affecting the company.
The only way to remove investors is to buy them out, but that will likely be more expensive than the money they originally gave you.

DEBT FINANCING
Debt financing involves the borrowing of money and paying it back with interest.
The borrower accepts funds from an outside source and promises to repay the principal plus interest, which represents the “cost” of the money you initially borrowed.

SOURCES / TYPES OF DEBT FINANCING
• Loans
• Trade Credits
• Installment Purchase
• Asset Based Lenders
• Bonds

DISADVANTAGES OF DEBT FINANCING
• It can be expensive
• You may not qualify
• You may be held personally responsible to pay

Equity Financing vs. Debt Financing Example
Company ABC is looking to expand its business by building new factories and purchasing new equipment. It determines that it needs to raise N50 million in capital to fund its growth.
To obtain this capital, Company ABC decides it will do so through a combination of equity financing and debt financing. For the equity financing component, it sells a 15% equity stake in its business to a private investor in return for N20 million in capital. For the debt financing component, it obtains a business loan from a bank in the amount of N30 million, with an interest rate of 13%. The loan must be paid back in three years.
There could be many different combinations with the above example that would result in different outcomes. For example, if Company ABC decided to raise capital with just equity financing, the owners would have to give up more ownership, reducing their share of future profits and decision-making power.

Conversely, if they decided to use only debt financing, their monthly expenses would be higher, leaving less cash on hand to use for other purposes, as well as a larger debt burden that it would have to pay back with interest.

START UPS
Yourself
Asset-Based Lenders
Family & Friends
Home Equity Loan
Suppliers & Treat Credits
Local Angels
Specialized Banks
Microfinance Banks
Government Institutions
Charities
Co-operatives
Special Financial Institutions

GROWTH
Internal Funding
Commercial Banks
Development Banks
Venture Capitalists
Stock Exchange (IPO)
Asset-Based Lenders
Grants

MATURITY
Stock Exchange (Shares & Bonds)
Asset-Based Lenders
Development Banks
Commercial Banks

CONCLUSION
Businesses must determine which option or combination is the best for them.