Cash Flow and Credit and Background Investigation

Assignment:

1. What are the different types of Equity and Debt Financing

Equity financing is the process of raising capital through the sale of shares.
Companies raise money because they might have a short-term need to pay bills or
need funds for a long-term project that promotes growth. By selling shares, a
business effectively sells ownership in its company in return for cash. Equity
financing involves the sale of common stock and the sale of other equity or quasi-
equity instruments such as preferred stock, convertible preferred stock, and equity
units that include common shares and warrants.

A startup that grows into a successful company will have several rounds of equity
financing as it evolves. Since a startup typically attracts different types of investors at
various stages of its evolution, it may use different equity instruments for its financing
needs.

Types of Equity Financing

Individual Investors
These are often friends, family members, and colleagues of business owners.
Individual investors usually have less money to invest, so more of them are needed
to reach financing goals. Such individual investors may have no relevant industry
experience, business skills, or guidance to contribute to a business.

Angel Investors
Often, these are wealthy individuals or groups interested in providing funding to
businesses that they believe will provide attractive returns. Angel investors can
invest substantial amounts and provide needed insight, connections, and advice due
to their industry experience. Normally, angels invest in the early stage of a
business's development.

Venture Capitalists
Venture capitalists are individuals or firms capable of making substantial investments
in businesses that they view as having very high and rapid growth potential,
competitive advantages, and solid prospects for success. They usually demand a
noteworthy share of ownership in a business for their financial investment,
resources, and connections. In fact, they may insist on significant involvement in the
management of a company's planning, operations, and daily activities to protect their
 investment. Venture capitalists typically get involved at an early stage and exit at the
IPO stage, where they can reap enormous profits.

Initial Public Offerings

The more well-established business can raise funds through IPOs, whereby it sells
shares of company stock to the public. Due to the expense, time, and effort that
IPOs require, this type of equity financing occurs in a later stage of development,
after the company has grown. Investors in IPOs expect less control than venture
capitalists and angel investors.

Crowdfunding
Crowdfunding involves individual investors investing small amounts via an online
platform (such as Kickstarted, Indigogo, and Crowdfunder) to help a company reach
particular financial goals. Such investors often share a common belief in the mission
and goals of the company.

while Debt financing is essentially the act of raising capital by borrowing money
from a lender or a bank, to be repaid at a future date. In return for a loan, creditors
are then owed interest on the money borrowed. Lenders typically require monthly
payments, on both short- and long-term schedules. Debt financing occurs when a
firm raises money for working capital or capital expenditures by selling debt
instruments to individuals and/or institutional investors. In return for lending the
money, the individuals or institutions become creditors and receive a promise that
the principal and interest on the debt will be repaid.

Types of Debt Financing

Non-Bank Cash Flow Lending
When banks evaluate companies for traditional loans, they analyze a broad set of
factors, like credit history, investment history, assets, and profit. Banks seek to
minimize risk by determining your future capacity to pay them back. Non-bank cash
flow loans work similarly, yet are approved based on a much smaller set of factors.
Lenders use the company’s cash flow rather than their assets to determine loan
viability. The company may also be reviewed on facets like transaction frequency,
seasonal sales, expenses, customer return rates, and even online reviews. Most
lenders decide within one to three business days, providing companies capital
ranging from $5,000 to $250,000.

Recurring Revenue Lending

Recurring Revenue Lending, otherwise known as SaaS (Software as a Service) credit, funds
companies as a function of their monthly recurring revenue (MRR). Your accessible amount
changes based on the revenue garnered through customer subscriptions. MRR loans are
structured as a line of credit that can be borrowed and paid back whenever needed.
Additionally, companies aren’t required to pay back interest if nothing is borrowed. MRR
funding is an excellent option for businesses that boast a proven track record of retaining
customers for recurring services. The option is especially recommended for those with few
assets that are growing their revenue stream faster than 20 percent annually. High-margin,
high-growth businesses with a SaaS structure rely on MRR financing to increase their cash
runway, or the length of time the business will remain solvent if they are unable to generate
any additional revenue. Recurring revenue is highly attractive for companies seeking to
finance rapid growth without adding more shareholders.

Loans from Financial Institutions

While bank loans are hard to come by for small and middle-market businesses, we would be
remiss to not include them in this list. After all, of the many types of debt financing, traditional
financial institutions are still one of the most common providers. To qualify, companies need
to adhere to a strict set of requirements, boast robust credit history, and feature long-term
investment history. Banks are much more likely to lend to established businesses with a
proven track record of success. There are three types of long-term loans: business,
equipment, and unsecured loans. Business loans are intended for virtually any company goal.
The loan may be provided for a specific purpose, such as onboarding new staff, or with no
strings attached.

Loan From a Friend or Family Member

Low interest rates, minimal paperwork, and immediate capital. Companies must carefully
evaluate their needs and ability to pay off a family loan. Would you be able to pay back your
friends in case of bankruptcy? Are your friends fully aware of the financial risks of investing in
your business? Do you have a clear idea of how the capital would help grow your operation?
To avoid the most common risks and pitfalls associated with this type of debt financing, it’s
wise for startups to go into family loans with a detailed plan for how they plan to pay off their
debts to family and friend investors.

Peer-to-Peer Lending
Peer-to-Peer (P2P) lending rose to prominence with the birth of sites like KickStarter, Prosper,
and GoFundMe. As one of the most accessible alternatives to family financing, P2P lending
matches borrowers with individual lenders that believe in the company’s services. This lending
option is most appropriate for small startups comfortable revealing their financial details
publicly. Some online platforms may require detailed financial statements, revenue
projections, or evidenced assets. Of course, P2P lending can damage a company’s reputation
if they’re unable to produce a return or provide a promised product. Perhaps most regrettably,
peer lending services don’t offer the professional guidance and flexibility that established
alternative lenders do

Home Equity Loans & Lines of Credit

A home equity loan is a one-time cash infusion that’s repaid at a fixed monthly rate, similar to
a mortgage. Compared to other types of debt financing, home equity loans are highly
predictable funds repaid at the same amount every month. That said, payments will be higher
since borrowers repay both interest and principal over time. Alternatively, a home equity line
of credit allows borrowers access to a set amount of cash that they can optionally draw from
whenever needed. Interest isn’t charged until funds are withdrawn; however, the interest rate
charged may be variable depending on the prime rate. Since the loan is secured by property,
home equity interest rates are far lower than standard bank loans. The average interest rate is
just 6 percent, compared to the average 8 to 10 percent interest rate associated with bank
loans. Better yet, the interest is tax-deductible if used to improve borrower property.

Credit Cards
Business owners have long used credit cards to build their companies and create trust with
future lending associations. Small business credit cards are guaranteed personally through
the buyer, meaning that established business credit isn’t required to use one. Many come with
favorable introductory offers, such as 0 percent APR for the first year. Credit cards can also
ease the burden on small accounting departments since a single monthly bill is paid out rather
than dozens of unrelated invoices. Some cards offer cash-back or points rewards that can be
used towards travel and other business expenses.

Bonds
Bonds are essentially loans taken out by companies, government agencies or other
organizations, the twist being that the capital comes from those investors who buy bonds from
the company or organization. That company then pays out interest regularly — normally every
six to 12 months — and when the bond reaches maturity, returns the principal.
Short-term bonds, issued by companies that have immediate needs, mature within one to
three years. Medium-term bonds typically reach maturity in 10 years or more, and long-term
bonds — issued by companies that require funding over an extended period — can stretch 30
years or more.Bonds can be secured or unsecured — i.e., backed by collateral or not — and
they differ from stocks in that a bond’s characteristics are determined by a legal document
known as an indenture, an agreement between the two parties. When companies are unable
to net a bank loan, bonds solve the problem by allowing alternative investors to become
lenders. Lenders can either buy bonds or sell them to potential investors.

Debenture
A debenture is similar to a bond, the biggest difference being that debentures are backed not
by collateral but rather by the reputation of the borrower. They are, in other words, high-risk
but also high-reward, paying higher interest rates than standard bonds. As with bonds, the
borrower issues an indenture to the lender, outlining the details of the loan, maturity date,
interest rate, etc. While the terms vary from one debenture to the next, they typically run
longer than 10 years.