Many businesses get started in a year, and many of them get ended in the same period. Some of them nourish and cope up with the challenging needs, and some failed to do so. Central core aspect in business development is the preparation of feasibility and determining the core requirements of the firm over shorter and longer time periods. These conditions need to be classified appropriately as financing, expertise-related or administrative.
Startups require investment as their core need to grow, excel and to survive in the environment. Financing needed is heavily concerned with the business and strategic objectives of the startup. If objectives are to be executed at a lower scale then limited financing would suffice the job otherwise financing required would be enormous.
Financing can be arranged in various ways. It may start with the proprietor’s resources and will lead to the huge bank loan in case massive funding is required. Depending on the funding required and risk appetite that startup wants to bear financing modes shall be chosen.
Usual and primary investment method shall be proprietor’s resources in the form of available liquid assets. These may include immediately available cash, assets which can be sold out to finance the initial business needs and other securities such as shares, certificates, etc. Once this financing model has been exhausted, and business still needs to have investment so then can go for a short-term bank loan but for this company has to prove its financial feasibility and its ability to repay on time with related interest.
If the startup is formed as a company, they have the power to raise capital through the issuance of shares. However, only listed companies can do so unlisted and private enterprises have to resort to other available means. Short-term bank loan in respect of private and untraded companies would help to meet their working capital requirements. However, for plant and machinery installation in case of large manufacturing companies, they will require a substantial bank loan.
Bank lending can only be provisioned if it can be proved that business will demonstrate its ability to repay such loan with interest. If, however, this cannot be established before the bank or financial institution in that case business has to search for other available models and measures.
Once a startup has been in the firm, then they can pursue reinvestment of their profits strategy to run successfully and with full pace. Further, a startup can have the policy of negotiating with their suppliers but for this, they will be requiring and will have to accept huge margins for them as initially, no one will come up to the demands of them.
Businesses may have the policy to sell their debtors to factors; this will reduce the investment in working capital and hence business may focus towards long-term financing needs of the company. Mode chosen should be economical to the firm and should not be in non-compliance with the strategic objectives of the enterprise.
If a company has exhausted all the available means of financing then after that only method which is available for disposition is the issuance of debt securities. Issuance of such securities have, however, some cost which must be considered and borne in mind. These may include huge issuance costs, regular coupon payments and redemption of the security after its period has been terminated. Further, this mode can only be pursued if the business is in serious need of financing and all available methods have been completely and entirely exhausted, and business can demonstrate its related cash flows wisely and with full consideration.
The method of financing chosen should be directly linked to the funding needs of the startup, and it should approach to achieve the defined business and strategic objectives for the company.