Financial Planning And Equity Investment

A good financial plan displays to investors that you are a competent manager, and that you may have that special managerial advantage over other small business owners looking for collateral money. You may gain a decided advantage through well-prepared plans and projections including: cash budgets, pro forma statements, and capital investment analysis and capital source studies.

Cash finances should be projected for one year and prepared monthly. They need to combine expected sales profits, cash receipts, materials, labor, and overhead expenses, and cash disbursements on a monthly basis. This allows expectation of fluctuations in the amount of cash and planning for short-term borrowing and investment. Pro forma statements should be prepared for planning up to 3 years ahead.

Now, making these financial plans will not guarantee that you will be in a position to get venture capital. Not making them will practically assure that you will not receive favorable consideration from venture capitalists. An investment in the business may maintain the final form of direct stock ownership which does not impose fixed charges. Much more likely, it’ll be within an interim form, such as a kind of loan that can be changed into stock. Most collateral financing agreements ensure a major investor participates in virtually any stock sale and approves any merger, no matter their percentage of stock ownership.

Sometimes the agreement requires that management work toward an eventual stock sale or merger. Clearly, the owner-manager of a little company seeking equity financing must consider that consuming a project capitalist as a partner may be practically a commitment to market out or go open public. There are many paths to locating equity capital. Individual private traders. Private placements of equity can be produced through your connections, those of your financial adviser, or by presentations before investment groups. Finder firms. Such companies might be able to help the small company seeking capital, though they are not sources of capital themselves generally. Deal with reputable, professional finders whose fees are in line with industry practice.

Further, remember that investors generally prefer to work straight with principals in making investments, though finders might provide useful introductions. Once an interested investor is located, all of those other process would appear simple; if you are offering stock, you take the traders’ check and give them a stock certificate. Or if it was to be a loan, you would take the check and sign a note.

Unfortunately, it’s not quite that simple. Whatever the source of financing–family and friends, angels, or capital raising, expect some “homework” to be performed. Claims would be confirmed, and generally some types of guarantees of collateral on the part of the entrepreneur would be documented, and situations where in fact the investor could take charge of the business possibly. Entrepreneurs, in their enthusiasm, often oversell. The execution of documents that obviously express responsibilities and safeguards is essential to something based so heavily on trust.

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