When one has an idea of starting up a business, there are many requirements that are required so as to make it possible, these requirements are such as location of the business, influstructure, legal requirements, and capital. The main requirement however is the source of initial capital required to set up the business. There are various sources of funds to that a person can adopt to start a business. These include funds obtained through banks or lending institutions also referred to as debt or debentures, there is venture capital or private also known as angel and funds that come from investors commonly known as equity capital.
Equity funds has numerous carefully selected stocks which achieve a fund’s stated objectives like long-term growth of a business, total return, capital appreciation or a combination of the three, Schilit (1990). Equity capital of an intellectual property can be obtained from sources such as personal funds. Personal funds are such as own savings, inheritance from a person or personal borrowings from financial institutions, help by friends, relatives and funds from business associates. They can also be obtained from potential employees by offering them to become investors in your business.
Funds received from employees have an advantage in those employees who have contributed business capital tend to be more committed to work and they are usually willing to receive low wages and salaries. The owner therefore should also give him/herself a low salary so as to be on the same line. Another good source of capital for a business can be derived from business partners especially those who have the money and business knowledge. Owners should find partners who are expertise in the business line which he/she is not good at so as to improve the business at all levels.
Investors are the fourth source of funds where a business owner should first look within the industry to get active investors since an investor will prefer to invest in a business which he/she understands and he therefore will have far less explaining or selling of the concept to do as the investor will have the knowledge of the business industry. Having investors in the business is also advantageous because their influence in the industry may provide access to additional contract opportunities for owners in the industry.
If a business man alternatively seeks passive investors who have little or no involvement in the business, he/she should find professionals who have a steady income and a primary responsibility which does not allow them to interfere in your time. Doctors or a group of medical practitioners, a lawyer or professional financiers are a good example of such investors. The fifth source of equity funds is by taking a business public where the public is allowed to have a share in the business.
This however is probably the most risky choice and is usually not a recommended option for very new or very small businesses due to the number of legal issues and the long processes required to achieve it. Running a public company may also be stressful since a considerable amount of ownership and control of the business is lost hence a business person should be absolutely sure that this is the wisest course of action before making a decision to make the business public. According to Seidman (2005), advantages of equity financing are first, there is no fixed payment requirement therefore it does not add to firms fixed costs.
Second is that investors and owners are concerned on building future earnings and value of the firm therefore it is a long term source of funding. Another is that it leaves firms assets available for other financial needs and finally, it places fewer restrictions on use of funds and the business financial status. According to Paganetto (2005), use of equity finance and initial public offers have raised in many countries therefore countries with well developed markets for venture capital and new equity have an advantage in the production of high-tech goods.
Despite being a good finance source, equity finance comes with several disadvantages which may hinder growth of the business therefore resulting losses and a probability of business closure. One is that business owners end up losing a significant level of business control as different ideas on operations and business direction are brought by the investors. Some kinds of equity finance like the initial public offers have tedious legal work and require one to comply with regulations which may be long and complex.
Another disadvantage is that raising equity finance is demanding, costly and time consuming therefore your business may suffer as you devote time to the financial deal. In conclusion, therefore, equity finance can be made cost effective by use of other methods of financing which are less costly. Owners should also check the effect of equity on the current and future capital structure of the business since he /she may end up working for other people like investors and employees who have contributed capital other than him or herself, Schilit (1990).