There are three basic types of investor funding: equity, loans and convertible debt. Each method has its advantages and disadvantages, and each is a better fit for some situations than others. Like so much else about the fundraising process, the kind of investor-based fundraise that is right for you depends on a number of factors: the stage, size and industry of your business; your ideal time frame; the amount you are looking to raise and how you are planning to use it; and your goals for your company, both short-term and long.
Pursuing an equity fundraise means that, in exchange for the money they invest now, investors will receive a stake in your company and its performance moving forward. At the outset of your fundraise, you set a specific valuation for your company—an estimation of what your company is worth at that point.
Based on that valuation and the amount of money an investor gives you, they will own a percentage of stock in your company, for which they will receive proportional compensation once your company sells or goes public. There are several situations in which an equity fundraise makes the most sense, or is the only real option for a company. Internet companies, for example, are notorious for going years in operation without even attempting to charge their customers. While home-growing your company from your kitchen or spare bedroom bit by bit may not sound as glamorous as hitting the ground with investors already in your lineup, most investors will expect you to start there before they invest.
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But some businesses—a private jet service, for example— require a massive amount of capital just to get off the ground. In those cases, you have little choice but to go directly to equity. Equity capital tends to follow businesses and industries that have potential for massive growth and exponential paydays. Equity narrows your options: Choosing the equity route significantly narrows your options when it comes to the future of your company. Equity investors are interested in one thing: liquidity.
Before they invest in the first place, they are going to look for assurances that your idea can sell and sell big, and that that is your plan, so before you pursue the equity fundraising route, you should be sure that that is your vision as well. Equity investors expect big rewards for big risks : If every entrepreneur could walk into a bank and get a loan to finance their idea, many probably would. Unfortunately, banks are incredibly risk-averse, and only want to provide loans that they are sure will be paid back.
Competition for equity investments is high: There are far more people looking for equity investors than there are checks being written. Most equity investors will see hundreds if not thousands of deals in a given year before they fund even one. Getting an equity investor is like getting a perfect score on your SATs: you have to be in the top percentile of the top percentile of the most prepared and motivated entrepreneurs in order to be one of the few that walks away with a check in hand. So if you and your business are in a time crunch, equity fundraising may not be the best way to go.
Loan or debt-based fundraising is the easiest of the three varieties to understand in basics: you borrow money now and pay it back later, with an established rate of interest. Debt is also the most common form of outside capital for new businesses. When you decide to pursue debt-based fundraising, you specify in your fundraise terms the rate of interest that will come with the repayment of the loans you receive. You may also provide an expected time frame in which the loans will be repaid. The more collateral you have, the better your chances of securing large amounts of financing.
As collateral for these loans, Rusty offers the cars themselves, as well as mortgage on the property for the dealership, which he already owns. As with equity, there are a handful of scenarios where debt is the most useful option for financing your company. Debt raises lend themselves well to smaller amounts of capital. Debt raises tend to move along faster, giving you a better shot at getting you the funds you need when you need them.
If your funding needs are in the physical realm—you just need real estate, for example, or computers or other equipment— a debt raise makes a lot of sense. Many entrepreneurs are understandably reluctant to give up equity in their company, and a straightforward debt raise has the attractive benefit of allowing you to retain ownership and control of your company.
Small Business Association. In this case, our wildly indebted yet somehow solvent government plays cosigner to your loan. This is due in part to factors such as the new money from Fed stimulus not entering the economy, a slow global economic recovery, and depressed energy prices. The month of January saw a sharp 0.
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However, the reading for the month of February was a tamer 0. While inflation is still low, there are concerns that it could accelerate.
In addition to the long-term impact inflation has on the purchasing power of money, it can also affect the investments of retirement plan participants in the short term. The impact is different across each asset class and sector of the market. Unexpected and sharp increases in inflation can be a drag on stock returns, as companies attempt to combat higher input costs by passing them on to consumers.
On the other hand, periods of normalized inflation i. Stocks are typically categorized as either value or growth. Value stocks have strong current cash flows that tend to slow as time passes. Growth stocks have little or no current cash flow, but cash flows will gradually increase over time.
Rising inflation tends to have a stronger negative impact on growth stocks than value stocks. Interest rates are often raised to combat inflation, and this causes the present value of future cash flows to be discounted at a higher rate and thus reduces their present value. The cash flows of growth stocks are anticipated to be higher in the future.
In periods of inflation, investors may discount growth stocks at a higher rate, making them less attractive and hurting their valuations. Relative to their growth counterparts, value stocks have fared better in inflationary environments due to their cash flows being more immediate. When considering cash flow, it is also important to understand how inflation impacts the fixed income market.
A traditional bond is an instrument that gives the holder a stream of cash flow coupons over a period of time. When inflation increases, interest rates tend to rise as well. This negatively impacts the present value of those future cash flows. Simply put, if rates rise across the credit curve, investors may begin to demand higher rates of return or lower prices for bonds being traded. Additionally, if inflation is on the rise, the future coupon payment of a bond will buy less goods and services than it would today. Fixed income instruments have a wide range of maturities, and inflation impacts these bonds differently.
As inflation and rates rise, short-term bonds i. Holders of short-term bonds receive their coupons sooner and are able to reinvest quickly at potentially higher rates of interest. The credit quality of a bond is also a key consideration. Performance varies when comparing U.
Treasury securities, with higher credit ratings, to corporate bonds, with lower credit ratings. If the economy is perceived to be healthy during an inflationary period, markets will favor bonds with lower credit ratings since they come with a higher coupon rate than U.
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On the other hand, if the market feels the economy is not on good footing, markets will favor bonds with a higher credit rating, such as U. High-yield bonds offer higher coupons and yields relative to investment-grade bonds. Investors accept the increased credit risk of high yield bonds in exchange for a higher yield.