Raising Funding: Business Valuation, Early-stage Funding, Sources

What is Business Valuation?

The process of determining the economic value of a whole firm or company unit is known as business valuation. For a variety of purposes, including sale value, establishing partner ownership, taxation, and even divorce proceedings, company valuation can be used to evaluate the fair value of a business. Professional business evaluators are frequently consulted by business owners seeking an objective appraisal of their company’s worth.

In corporate finance, the question of business value is regularly discussed. When a firm wants to sell all or part of its operations, combine another company, or buy another company, a business appraisal is usually performed.

The process of establishing the present worth of a business using objective criteria and evaluating all areas of the business is known as business valuation. A review of the company’s management, capital structure, future earnings projections, or market worth of its assets can be included in a business valuation.

Evaluators, firms, and sectors all utilize different tools for valuation. An examination of financial records discounted cash flow models and similar company comparisons are all common techniques of business valuation.

The Internal Revenue Service (IRS) mandates that a company’s fair market value must be determined. Some tax-related actions, such as the sale, acquisition, or giving of a company’s shares, will be taxed based on their value.

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Early-stage Funding

To start a business, entrepreneurs need funds. Entrepreneurs may require funds for starting a new business or for expansion or diversification. The foundation of a business is finance which is needed for purchasing business assets, machines and equipment, raw materials, etc., for the smooth flow of economic activities.

The amount of capital invested in business depends upon the type of business the entrepreneur wants to set up. Large capital is needed at the time of starting the enterprise. Some capital is required for carrying out the daily business operations. When the enterprise grows and business operations expand, more funds are needed.

Entrepreneurs invest money in installing new technology, which is a long-term investment. New technology means upgraded software, new machinery, and tools for performing business processes with higher efficiency, and higher quality without taking much time. Depending on the business and the level of interest among possible investors, several sources of funding are available to companies. These sources are broadly categorized into three classes, which are:

Long-term Financing

It is the long-term capital need of a business for more than 5-10 years. The entrepreneur uses this source of finance to do capital expenditure in purchasing fixed assets such as machinery or plant equipment. Part of working capital that permanently stays with the business is also financed with long-term sources of funds.

Long-term financing sources can be in the form of:

• Share capital
  
• Retained earnings
  
• Bonds
  
• Term loan from a bank

Medium-term Financing

It is a medium-term capital need of the business in which the finance is provided for 3 to 5 years. Medium-term financing sources are used for business expansion.

The medium-term sources of financing are:

• Borrowings from banks
  
• Public deposits
  
• Lease financing
  
• Loans from financial institutions

Short-term Financing

It refers to the capital requirement of the business for not more than 1 year. The requirement for short-term finance arises when an entrepreneur needs to purchase current assets for the business such as raw material or inventory.

The short-term sources of finance are:

• Trade credit
  
• Short-term loans from commercial banks
  
• Fixed deposits for 1 year or less
  
• Advances received from customers
  
• Creditors
  
• Bill discounting

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Types of Sources of Financing

Money is considered as the bloodline of any enterprise. When starting a business, entrepreneurs find the most suitable way to finance the start-up. The funds required for a business highly depend on the nature of the business and its type. Some of these types of sources of financing.

Self-funding/bootstrapping

Self-funding is also called bootstrapping. It is the most common way of financing start-ups at an initial stage. First-time entrepreneurs often opt for this way. They invest their savings or arrange money from their family and friends. This is the easiest method which involves less formalities and no or less cost of raising funds. The cost of raising funds refers to the interest charged by the person or institution such as a bank for providing funds to the entrepreneur for investing in business.

Bank Loans, Factoring, and Supplier Lines of Credit

When a bank offers to lend money to customers for a set length of time, this is known as a bank loan. The borrower will be required to pay a set amount of interest per month or per year for a fixed period as per the condition of the bank loan. Banks have been allowed borrowing and lending freedom both internally and externally, allowing them to operate more freely in lending and investment operations.

Banks have been able to enter directly into leasing, hire purchase, and factoring services since 1994, rather than through subsidiaries. In other words, banks are free to enter or depart any industry based on their profitability, but they must adhere to certain Reserve Bank of India (RBI) criteria.

A factor is a financial institution that provides services related to the administration and financing of a variety of debtors resulting from credit sales. Factoring is a prominent method of managing, financing, and collecting receivables. After the establishment of subsidiaries in India, factoring services began in April 1994. It is still in the early stages of development.

Only four public sector banks in India are authorized by the RBI to provide factoring-related services in their respective regions: State Bank of India (subsidiary State Bank of India Factoring and Commercial Services Limited), Canara Bank (Canara Bank Factoring Limited), Allahabad Bank, and Punjab National Bank to serve the Western, Southern, Eastern and Northern regions, respectively.

A supplier’s credit is a trade credit that is granted to an importer based on a Letter of Credit (LC). Under the LC form of payment, the importers are funded by overseas suppliers or financial institutions, ideally from the seller’s country, at lower rates than the local source of funding.

It benefits the supplier because payments are made soon after the items are delivered, allowing the importer to negotiate better prices. Since the issuance of letters of undertaking or LOUs has been prohibited, importers are turning to suppliers’ credit, which offers lower interest rates than buyer’s credit.

Angel Investors

This is a type of financing in which individuals having surplus cash are interested in investing in start-ups. These investors collectively analyze the business proposal before making any investment and also monitor and advise the entrepreneur in making business-related decisions.

An angel investor refers to a person or individual who invests in a new or small business venture, providing capital for start-up or expansion.

Government Sources of Funding

Government support can be defined as direct funding support by way of public sector capital contributions, usually in the form of grants. These may come from community, national, regional, or specific funds. They may be designed to make a project bankable or affordable. They may take the form of contingent support or guarantees by the public sector for the public–private partnership (PPP) company or other private sector participants.

This may be for certain types of risks that cannot otherwise be effectively managed or mitigated by the PPP Company or by other private sector participants (for example, minimum revenue guarantee for a toll road).

Equity Financing

Private equity is private financing which is composed of funds and investors that directly invest in private companies. Private equity investors provide funds to install new technology, make new acquisitions, expand working capital, and bolster an organization’s balance sheet. Private equity firms help companies to grow and then reap benefits after the companies go public or merge with other firms.

The practice of obtaining funds through the selling of shares is known as equity financing. Companies seek money for a variety of reasons, including a pressing need to pay bills or a long-term aim that necessitates capital to invest in their expansion. A firm effectively sells ownership in its company in exchange for cash when it sells shares.

An entrepreneur’s friends and family, investors, or an initial public offering (IPO) are all possible sources of equity financing. An IPO is a process by which private corporations offer shares of their company to the public in a new stock issuance. A firm can raise funds from the general public by issuing public shares. IPOs raised billions of dollars for industry heavyweights such as Google and Meta (previously Facebook).