INTRODUCE A NEW PRODUCT
Funding your new product or service will be much easier than starting a new company however, depending on your existing profit margins you may not have enough R&D capital to go at it alone. Taping into your Equity and Debt may be your best funding option in that case. The same ratios of Equity to Debt apply at this lifecycle with high equity and low debt financing being much easier to acquire from local bankers, the government and private equity than high debt and low equity from venture capitalists.DEBT FINANCING ------------------------------ EQUITY FINANCING
Secured, Short Term, w/Interest Long Terms, No Payments BUT gain Control
BANKS / GOVERNMENT
PRIVATE EQUITY
CROWD-FUNDING
The SBA Small Business Administration will Guarantee some loan to the Banks in order to fuel economic recoveries, struggling communities and even specific minority groups and natural disaster and/or seasonal fast and Famine loans from local bankers, savings and loans, credit unions and commercial/micro lenders. The lenders will require that the borrower prove their ability to payback the loans either by having personal or business collateral, cash reserves and good credit. The loans are typically short term/single purpose loans, anywhere between 3-12 months and principal + interest payments will be due monthly. Although the approval process is lengthy it ensures low risks to the lender and allows the borrower to intently carefully consider the business use of the loan. The borrower must provide financial statements for the 2 Years with positive cash flow, profit & loss and business asset ecords which may be required as depreciated collateral should the business fail to repay the loan. The institutions may require that the borrower secure 40-60% of the loan upfront.
PRIVATE EQUITY
There are over 1,000 private equity firms and the number is growing, however the top 2 firms KPCB & Sequoia account for 31% of all investments with an average return of 5-10% gain over principal and 18-25% of companies funded failing altogether. Because of the high risks associated with lending companies with debt which is higher than 4Xs equity will not be funded because they are considered over-leveraged. The companies whose criteria is acceptable to the investors will have to share company control or equity as collateral which allows the lender to sell such equity at any point in order to repay the original investment. The private equity lenders usually have longer loan terms of 4-6 years and will commonly provide the loans in multi-round disbursement at various stages of the business lifecycle such as Start-ups, Early, Growth, Late. There are usually no monthly payments required until either borrower or lender exit the agreement however since the risk/reward ratios are much greater the approval process must include at least 1 million dollars capitalization potential and credentials depicting a strong executive team that is ready to optimize the business for profit by find every possible efficiency in order to grow exponentially and share control in that business decision making process.
CROWD-FUNDING
There are over 200 crowd-funding websites and services that have raised more than 2 billion dollars in the USA and 5 billion worldwide including some of the original consumer gadget trail blazzers like www.kickstarter.com out of Brooklyn, NY who has offered 54 thousand projects while raising 900 Million dollars from 5.4 million pledges/future customers. The average fee for posting a project is 5% and 44% of projects have been funded. www.indiegogo.com out of California focuses on Arts & Products. They have posted 44 thousand projects and raised 200 million dollars while charging anywhere between 4%-9% processing fees. 34% of the projects have been funded so far.. www.lendingclub.com focuses on personal loans and they have processed 300 thousand loans so far worth around 3 billion dollars while charging an average of 16% APR.
Many large and small companies are using crowd-funding for product development as well as new business ventures. It is the most exciting group to enter the field and promises to help entrepreneurs like you bring complete products to market in record speeds with little to no risk and long financing cycles by selling the product to consumers BEFORE it is actually manufactured.
