In this case, it is advised to look in for a more structured form of finance rather than unstructured financing option like funds from relatives and friends. This is because structured finance has several advantages which funds from relatives may not have.
2. Decision Making: Moreover, just as in the case of "Gift Baskets", the fund giver has to be given a say in the decision making and strategic moves of the business. This may also result in delay in decision making.
3. Partnership: When one approaches a relative or friend for investment in the business, it is generally done by an offer of partnership. This means an additional person would be there to share the profits of the business. However, the other funding options do not require this.
4. No Expertise: The promoters of the business may be well aware of the industry and the market scenario. However, the relative who contributes to the business capital as an investment may not have similar expertise. This will result in hassles, when some necessary move is to be taken in the business and the relative does not agree with it.
5. Revelation of Secrets: The business happens to be the brain child of the promoters. A partner who can fund your business can as well take up your business idea and start his own business, if the matter is money.
Banks are one of the known forms of funding the business financ...
Let us now view a couple of structured funding options with their working and risks.
Banks are one of the known forms of funding the business finance gap. However, banks are normally considered conservative lenders. One can avail long term loans for premises, machinery, furniture etc. with his choice of payment horizon or short term loans renewed per year for working capital with collateral of stock and book debts. Generally, banks prefer to fund the business on the creditworthiness of the promoter's future scope of the business and the value of the collateral. They also expect secondary collateral in the form of some asset like insurance policies, fixed deposits, land, building etc.
Funds happen to be less expensive
Bank credit happens to build up reputation of the business
A choice of variety of loans suiting business requirements.
Integration is possible with other financial services
No infringement in business decisions
Conservative covenants and condition
Delay in sanction of loans
Paper work and requirement of business paper fulfilling all laws
High collateral or mortgage
Venture capitalists look for funding businesses with good future prospects and have an aim of having good returns through capital appreciation. This requires a solid and clear business plan with a long term view. However, they would also intend to have certain rights of control over the business. But, it would be right to note that, it would be in the best interest of the business as they are typically intending to make good out of their investment so as to make the business flourish to give them returns on their investment. The positive side of this source of finance is the good amount of availability and the risk involved is that of