Various types of business entities and equity financing
There are many different ways that one can start financing a new business. Doug Foshee suggests the best and safest way to finance would be to do finance through the use of equity. All businesses are a particular type of business entity.
A business can be a sole proprietor, a partnership, a limited liability company, or a corporation. It is important to carefully choose what type of business entity your business is because it can affect your ability to get financing and it will also affect your risk exposure to potential lawsuits.
A limited liability company, also known as an LLC, can limit the liability of the owners, this means the business’s assets are considered separate from the shareholders, otherwise known as owners, depending on which state you reside in, the laws could be different, and you will need to consult an attorney for specifics. This means that an LLC’s ability to finance will in part be determined by the assets which the business entity owns, which will be calculated separately from what the owner owns.
This, compared with a sole proprietorship, where you can try to obtain financing through the use of personal assets, a corporation or LLC would not be able to do this. If you decide that you need to finance your business through the use of equity, this is how it would work.
First, you should come to a valuation of your business, and this would require that you have an understanding of how businesses in your particular field’s net worth are calculated. For example, generally, restaurants valuations are based on about one times your yearly revenue. This means, that if your restaurant was bringing in revenue of about 1,000,000 dollars a year, your business would have a valuation of 1,000,000. For whatever particular business market that you are in, you’d want to figure out the exact valuation of your business, generally this is done through a number calculated from the revenue of the business.
Then, you’d have to find an investor willing to invest in your business. This will rely on your networking abilities. You’d have to find friends, families, co-workers, and associates and sell them on your business. You’d need to convince them to give you a portion of liquid cash in return for a equity stake in your business, so going back to the earlier example of the business being worth 1,000,000 dollars, if your monetary goal was raise 100,000 dollars, this means you’d be selling 10% of your business to your friend, family, co-worker, and/or associates in return for 100,000 dollars. Most likely, the investor will want to know what the funds will be used for, generally, if the funds are going to be used as part of your own salary, it will be hard to find an investor.
Typical reasons as to why a small business might need to raise the money are because they need accounts receivable financing or funding to receive fulfill an order of products.