Question

You and your best friend have just finished a Marketing Degree and are thinking about starting a company that targets virtual advertising for the likes of Facebook, Instagram and Tic Tock. The business will be run from your study as the cost of commercial leasing is too expensive for now, but you need state of the art equipment to compete in the field. As you have just finished Uni you have limited cash from your part-time jobs.

In your Business Plan you need to explain the 3 different types of finance that would be available to finance your business and describe two specific examples that are most suited to a start-up company given your new venture you will struggle to obtain finance from a bank loan or credit card.

Answer 1

The three different types of finance that would be available to me for the purpose of financing my business are:

· Debt financing – The business can raise debt from financial institutions and banks, government loan programs, etc.

· Equity financing – This type of financing is the money put in by investors who get an ownership position in exchange for their investments.

· Mix of debt and equity i.e. a hybrid – This includes hybrid instruments which carries features of both debt and equity. Examples are convertible debentures, warrants, options etc.

Two specific examples that are most suited to a start-up company given your new venture you will struggle to obtain finance from a bank loan or credit card are:

· Venture capital – in this case venture capital firms will provide financial support in exchange of ownership equity in your venture. Besides financial investments venture capital firms also provide advice and expertise to grow the business and leverage the business idea to develop a highly scalable business.

· Crowdfunding – This will entail everyday investors to invest in your venture alongside professional investors and venture capital firms. Other options are peer-to-peer investments, peer-to-business investments, and reward based crowdfunding.