Raising capital for StartUp or Small Businesses and need for financial management

1. Raising Capital for Start up or
Small Businesses
&
Need for financial management

2. Financial Management in nutshell:
In simple terms, Financial management means:
To collect finance for the company at a low cost and
To use this collected finance for earning maximum profits
Raising suitable sources of finance
Short term
Medium term
Long term
Investing the raised funds
Forecasting
Evaluating current markets
Risk assessment
 Dividend
Distributing the financial gains amongst the shareholders

3. Funding types for different stages
For many companies, fundraising is an ongoing (and seemingly never-ending) process.
Understanding the different stages of funding will help the founders and other company
executives better anticipate the company’s needs and the different sources of investment the
company will need to seek.
Let’s look at the types of stages of fundraising below:
Seed capital - Seed capital is the money you need to do your initial research and planning for
your business.
Start-up capital - Start-up, or working capital, is the funding that will help you pay for
equipment, rent, supplies, etc., for the first year or so of operation.
Mezzanine (expansion) capital - Mezzanine capital is also known as expansion capital,
and is funding to help your company grow to the next level, purchase bigger and better
equipment, or move to a larger facility.
Bridge capital - Bridge funding, as its name implies, bridges the gap between your current
financing and the next level of financing.

4. Sources of Finance:
Capital is the key to starting a business or expanding an existing business. You can have a great concept,
ideas, and people willing to work hard and give their best but if you don’t have capital it is very hard to
succeed. Raising money requires a logical process and new funding doesn't happen instantly. Raising
equity capital at various stages of a business's development is particularly tricky and requires proper
strategies. A number of alternatives are available, and choosing the right one for you can help fuel the
success of your company. Considerations for raising equity capital can include, among others, personal
investment, investment from partners, or contributions from outside sources such as investors or venture
capital providers. Some sources for raising capital are
Internal Source
 Personal savings
 Retained profit
 Working capital
 Sale of asset
External Source
 Long term sources of finance
 Medium term sources of finance
 Short term sources of finance
 Inorganic growth

5. Sources of Finance:
Long term
Medium term
Long term
sources of finance sources of finance
sources of finance
Short term
Short term
Inorganic
Inorganic
sources of finance growth
sources of finance growth
••Sharecapital or
Share capital or
equity share
equity share
••Preferencesshare
Preferences share
•Retained earnings
•Retained earnings
••Debentures/bondsof
Debentures/bonds of
various types
various types
••Loansfrom financial
Loans from financial
institutions
institutions
•Loan from state
•Loan from state
financial corporations
financial corporations
••Loansfrom
Loans from
commercial banks
commercial banks
•Grants from
•Grants from
Governments
Governments
••Venturecapital
Venture capital
funding
funding
••Assetsecuritization
Asset securitization
••Tradecredit
Trade credit
••Bankloan
Bank loan
•Bank overdraft
•Bank overdraft
Lease
Lease
••Advancesreceived
Advances received
from customer
from customer
••Variousshort term
Various short term
provisions
provisions
•Preference shares
•Debentures/Bonds
•Public deposit/Fixed
deposit for duration of
three years
•Commercial banks
•State financial
corporations
•Lease financing/hire
purchase financing
•External commercial
borrowings
•Foreign currency bonds
Merge
Merge
Take over
Take over
Alternative sources of finance
•Chit fund
•Pledging gold
•Asset finance
•Mortgages
•Business Angels

6. Long term finance:
Long term finance:
Advantage:
Advantage:
Stability
Stability
Cost of capital
Cost of capital
Disadvantage:
Disadvantage:
Long term agreement
Long term agreement
Risk
Risk
Short term finance:
Short term finance:
Advantage:
Advantage:
Emergency funding can be paid
Emergency funding can be paid
Plug cash shortfalls
Plug cash shortfalls
Easier to secure
Easier to secure
Lower interest rates
Lower interest rates
Disadvantage:
Disadvantage:
Immediate effect of raising rates
Immediate effect of raising rates
Additional assets to be pledged
Additional assets to be pledged
Not adequate
Not adequate

7. What to consider while raising capital for businesses
Proper estimation of total financial requirements
The finance manager must find out how much finance is required to start and run the company. He must find
out the fixed capital and working capital requirements of the company. His estimation must be correct. If not,
there will be shortage or surplus of finance. Estimating the financial requirements is a very difficult job. The
finance manager must consider many factors, such as the type of technology used by company, number of
employees employed, scale of operations, legal requirements, etc.
Proper mobilization
Mobilization (collection) of finance is an important objective of financial management. After estimating the
financial requirements, the finance manager must decide about the sources of finance. He can collect finance
from many sources such as shares, debentures, bank loans, etc. There must be a proper balance between
owned finance and borrowed finance. The company must borrow money at a low rate of interest.
What is the value of the company?
The value of a company is important because it is the basis for determining the "cost" of the new capital when
seeking equity additions to the capital structure. Generally, a valuation considers four questions:
How much is the company worth today?
How much could it be worth in the future?
How long will it take to create the future value?
What is the likelihood of achieving success?
Understanding how your company will be evaluated and being able to affect the valuation positively can
enable you to get higher valuations and retain greater ownership of your company when the investment is
funded.

8. What are the legal responsibilities to potential investor?
Business owners seeking funds from individual investors are required to provide forms and specific factual
information in understandable language to potential investors so that they have the ability to evaluate the
investment and determine whether it is right for them. Seeking and paying for competent legal advice
when soliciting, negotiating, or contracting with investors or lenders is mandatory for prudent business
owners
How to negotiate a win-win agreement?
Whether for a startup or an ongoing operation, involves two parties: the investor and the company.
Negotiations between investors and business owners involve, at minimum, the following factors:
•The Amount of Capital Invested.
•The Timing of the Investment.
•The Return on Investment.
•The Timing of the Return to the Investor.
•The Certainty of the Return.
•Control.
Conclusion:
Many financing professionals claim that the rigorous, stressful process of raising capital for a
new venture ensures that only the best companies receive funding. Persistence - the willingness to learn
from rejection without losing enthusiasm - is critical. Every idea, every company can be analyzed and
deconstructed to the point it is unworkable.