Key Resources of Fund Raising
Updated: Mar 11, 2022
Funds, finance, money, etc, are the synonyms for the liquid form of asset. A liquid form implies an asset that can be cashed or converted into cash easily without losing its value and “money” is the most liquid form. Money serves many motives not only from the perspective of an economy but also in general. We require money to fulfill our basic needs, for example, to purchase food, clothes, house, to commute from one place to another, to make big financing transactions, or lastly, to save it. Money, either in liquid or in the form of DD (demand deposits) is the lifeline of any corporation, may it be a company, a startup, an NGO, etc. Right from the very start, the entrepreneurs need funds to begin their operations, set up an office, advertise and market their products, etc. The unavailability of finance will land them in trouble. To cite a pertinent example, most of the businesses were hit terribly during the onset of the nationwide lockdown imposed due to the uncontrolled spread of COVID- 19. The production (primary sector) and manufacturing (secondary sector) activities were discontinued for a major period which had a significant impact on the tertiary sector as well. This harmed the growing motivation of budding leaders, teams, or startups.
In modern Macroeconomics, the demand for money is split into three parts. They are transactional, speculative, and precautionary. The transactional motive states that money facilitates transactions, for example, the purchase of goods or services, etc. According to the speculative aspect of money demand, it is better to hold liquid money rather than invest it in some riskier asset. Consequently, it believes that the activity of holding liquid assets must be preferred over the assets with high potential risk factors. Lastly, as the name suggests, the precautionary motive implies that funds are required in case of an emergency when other bonds cannot be cashed easily. The money that people use to attain their needs is usually earned by them, used from their savings, or borrowed from others. But this is not the case with large corporate houses. Their major money requirement is realized by a plethora of fund sources and we will discuss those sources in the presenting article.
Big companies require funds for multifarious activities. They have to carry out their principal business operations, diversify in various product domains, pay salaries to staff members, organize the management, conduct research, and development, collaborate with prospective industry giants, intensify their infrastructure, etc. All these activities are impossible without the use of liquid assets. Hence, discussing these sources is imperative when talking about Private Companies especially, because public enterprises have the option of issuing shares on the stock markets alike private firms. Following are some of the most noteworthy fundraising sources majorly opted by companies to satisfy their demand for funds:
Friends and Family:
In the initial phases of starting a business, a majority of people end up using their own capital and savings. This leaves them with no monetary security for future use. As profits may be meager in startup days, all activities cannot be financed with additional revenue. Consequently, as one’s own financing resources dry up, funds can be taken from family members and friends. This has some listed and observed benefits. The amount taken from acquaintances is usually repaid flexibly without any commitment and these people tend to take a lower stake in business operations.
Taking credit from banks or other financial institutes is the most conventional yet popular method to acquire liquid assets not only for businessmen but also for household use. A bank loan usually requires one to complete a plethora of formalities. To exemplify, a full record of the company’s past performance in the form of Profit and Loss, Balance Sheet, Income statement, revenue sources, detailed business plan for which loan has to be sanctioned, is required to be filed with bank authorities. After approving the documents and completing the required paperwork, the bank approves the loan on a fixed rate of interest to be paid along with the principal amount as stated in the memorandum of understanding signed by both entities.
In the modern world, the term “Crowdsourcing” is gaining a lot of momentum. It implies a mass gathering of investors where the business seeking funds is required to communicate its idea in the most engaging, exciting, and concise manner that persuades the investors to invest in the business. The only thing that differentiates the company from getting funds from crowdsourcing from the one unable to pitch successfully is the innovation and the quality of ideas used. Following are some of the famous websites:
Best Overall: FundRazr
Best for Creative Projects: Patreon
Best for Businesses: Wefunder
Best for Going to Market: Indiegogo
Best for No Fundraising Deadline: GoFundMe
Best for Social Causes: Chuffed
An angel investor is a term used for an individual with a very high net worth or a person well endowed financially who lends the funds to a business in exchange for an ownership stake in the company. These investors are keen on providing a substantial amount of funds to the business as they are given a dominant position in the company. As per the experience of many big corporate houses, angel investors are an expert in private equity. Availing funds from them is a herculean task as they tend to analyze every single detail of the company’s past performance and future plans of diversifying their field of operations. Angel investors usually work with people or businesses with insightful industry knowledge and vision.
The term “Venture capitalists” implies a group of very elite, ultra and high-income individuals who manage the number of funds flowing into the VC firms. Because of the volume of money that flows into venture capital firms, businesses able to secure capital through this medium are awarded deals in the millions on average. Similar to angel investors, venture capitalists also analyze the performance of the corporates pitching their project by Profit and loss, sources of revenue, balance sheet, etc. to get a hold of the company’s position in the market.
The above listed are the major financing resources used by private companies, in general, to raise capital and fund their business activities. Well, all the sources come up with varied advantages and disadvantages, as a result, these sources must be chosen wisely implying the strategy of the business.