AOF Entrepreneurship Unit 3 Lesson 9 Financing Options

AOF Entrepreneurship Unit 3, Lesson 9 Financing Options Copyright © 2009– 2015 NAF. All rights reserved.

Potential investors look at a variety of factors when considering whether to invest in a new business • Profitability • Likelihood of success • Interest in the field If you had a lot of money, what business would you invest in today? Why?

Accounting practices matter to investors • Accounting is an integral part of running a business. • Accounting helps entrepreneurs make decisions about every facet of a business. • Accounting reveals operational strengths and weaknesses, so entrepreneurs can improve profitability.

Your financing options can be broken down into two categories: debt (loans) and equity (an ownership share) DEBT • • Money borrowed from the bank, other institutions, or individuals Must be paid back plus fees and interest Usually a short-term commitment Not affected by the amount a business makes or loses EQUITY • • Money invested by shareholders Buys the investor a share in the business’s profits Long-term commitment The investor buys the right to advise and guide the business

New funding sources are changing the financial landscape for start-ups • Crowdfunding at sites like Kickstarter • Loans from neighbors and community members • Individual angel investors ! The amount you invest is your equity in the business. Have you donated money to a new venture using a crowdfunding site? What was it like?

Family and friends may invest, but keep in mind the consequences of losing their money! • Your friends and family may want to support a new venture, but their investments can come with strings attached. • Some larger investors may not like having small investors involved. Would you want family members to invest in your business? Why or why not?

Bank loans or credit cards are a frequent source of start-up funding for many small businesses and need to be repaid • Bank loans are one way to get outside funding for the business. • Bank loans or purchases made on credit must be repaid. • Once repaid, the obligations to the bank are ended. • Business plans can show banks that an entrepreneur is serious and has a solid plan for repaying the loan.

Angel investors are people who are affluent enough to invest their own money in new start-up businesses • Angels invest in small businesses in order to earn a share in their profits. • Some angels work in teams, and others work individually. • Angels can sometimes provide expert advice if they have experience in your field.

Venture capitalists raise money to fund specific types of businesses, such as software and biotech companies • Venture capital firms fund specific types of ventures that require a lot of capital, such as high -tech, biotech, and other major firms. • Venture capitalists offer professionalism and expertise to the businesses they fund. • However, venture capital firms will want to have a lot of control over how the new business is operated.

Grants, subsidized loans, and other special funding may also be available for certain new ventures • The US Small Business Administration helps startups get loans. • Certain industry associations or groups may offer special grants or loans for innovations in their industry. • Some grants may also be available for new businesses.