Know the Basics of the 7 Types of Funds When You Are Sourcing For Business Funding

By Ben Ang

You probably would have experienced the countless tormenting stresses and difficulties in getting the required funding for your new business ideas or products. Deep down within your heart, you know that your business idea or product will fetch significant returns for your investors. However, you do not know where to start from as your understanding of the basic fundamentals and characteristics of the various funds available are limited. Here are the descriptions of the 7 types of funds that you need to know when you are sourcing for business funding:

1. Leveraged buyout.

This is a form of private fund that is essentially a strategy that involves the acquisition of another company using a significant amount of borrowed money that is in either bonds or loans to meet the cost of acquisition. Most of the time, the assets of the company being acquired are used as a collateral for loans in addition to the assets of the acquiring company. This type of fund is to allow companies to make large acquisitions without having to commit a lot of capital. There is usually a ratio of 70 percent debt to 30 percent equity for leveraged buyout.

2. Private equity.

This refers to the shareholding of a company by investors who have invested in the company in exchange for its shares, thus having a certain degree of management control. These shares are not traded in public stock markets.

3. Private fund.

This fund is invested by the individual, or is pooled money from affluent individuals or institutions setup. This type of fund is invested solely in targeted companies and may or may not be managed by professional fund managers.

4. Growth capital.

This is a form of private fund which has the feature of a very flexible type of financing. The money borrowed under a growth capital line of credit can be used for any corporate purposes. Growth capital is a beneficial way to extend a company's runway between rounds of financing. The extra time can be utilized for completing additional milestones that will raise the company's valuation or as a form of insurance to ensure that all intended milestones are successfully accomplished. Besides, there are no requirements to provide invoices or other backup material when borrowing under this type of facility, hence the ease of an administration process.

5. Venture capital.

This is a form of private fund that is typically provided by external investors for financing new, growing or struggling businesses. These venture capital investments are regarded as high risk investments and are invested by venture capitalists. However, these investments offer the potential for above average returns.

6. Angel investor.

This investor is an affluent individual who provides capital for a business start-up in exchange usually for ownership equity. Angel investors do not manage the pooled money of others in a professionally managed fund. However, they often organize themselves into angel networks or angel groups to share research and pooling of investment capital. In Europe, they are termed business angel or in short angel.

7. Mezzanine capital.

This is a form of private fund that is also equivalent to unsecured, high yielding subordinated debt or preferred stock that represents a claim on a company's assets that is senior only to that of a company's shareholders. Mezzanine capital, also termed mezzanine debt often includes an equity stake in the form of warrants attached to the debt obligation or a debt conversion feature identical to that of a convertible bond. It is a more expensive financing source for a company compared to secured debt or senior debt because of the increased credit risk as it is less likely to be repaid in full in the event of a default. This type of fund can only be secured by the equity of the company not including the tangible assets. In compensation for the increased risk, a higher interest payment or an equity stake in the company will be rewarded to mezzanine debt holders. It is still a cheaper source of financing than equity as the current equity holders achieve less dilution.

When financing for your business, you have to bear in mind that the external fund that is injected into your company will result in losing a certain degree of control over your business. Differences in opinion by investor and investee teams will have a detrimental effect on your company as they are not focusing on the determined strategy but instead, ironing out the differences and procedures. This will result in loss of valuable productivity and induce unnecessary tension in your workplace. In the worst scenario, there will be loss of potential deals due to the inability to make swift settlements. However, there will be a pool of invaluable expertise, management skills and contacts that are brought together into the company with the funds by the investors, hence ensuring a higher level of productivity and efficiency that leads to a continuous expansion success.

Ben Ang is a entrepreneur, trader, investor, internet marketer and blogger. He has been trading and investing for the past 2 to 3 years, and always keen and willing to learn new knowledge or techniques to improve his trading, investing and also enhance his business. He has a investing blog where he shares knowledge and past experiences on his trading and investment.