What is Early-Stage Financing?

What is Early-Stage Financing?

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Funding is an important aspect in every company from setting up to operations and expansion.In the initial stages, funding is essential for the continued development of the business. With proper financing, a business can make purchases, invest and manage the company's debt.A new business presents a higher risk investment, unlike an established business that is mature and has assets that act as security. An existing company also has a known cash flow which gives investors the chance to review the firm's risks. Contrary to this, it is harder to estimate the risk profile of a new business.An investor must understand the different phases of a company. This overview will help you understand the diverse financial needs of each stage.

Financing Stages of A New Company

1. Early-Stage Financing

Within early-stage financing, processes such as conducting market feasibility studies, setting up a legal identity and most importantly, creating the product & services take place. Early-stage financing is often the riskiest stage of business development as the rates of business failure are relatively high. This is usually because at this stage the business does not have any financial track records, meaning that receiving a bank loan is highly unlikely. However, here area few examples of other sources of early-stage financing that entrepreneurs can use to fund business operations.

  • Self-Financing

Funding a business on your own may sound difficult but luckily there are many ways one can do this. Self-financing not only includes dipping into your savings or using income from your day job, but also utilising a credit card to cover expenses or refinancing your home mortgage in order to receive cash-back or cash-out to fund your business.

  • Friends & Family

Your friends and family may generously provide you with the capital required to start-up your business operations, regardless of the soundness of your business concept. In other words,ensure that none of this goes to waste as this source of capital is not carrying out any formal evaluation of your business, it is simply an expression of their support and love for you.

  • Government Grants

An example of a government grant scheme that you can apply for is a subsidy. This can help provide good financing; however, the eligibility criteria can be strict.

  • Alternative Lenders

An example of an alternative lender is Fintech companies. Fintech start-ups uses other data to determine the financial viability of the business such as e-commerce or payment data, but they typically charges relatively high interest rates. Examples of alternative lenders include Jenfi,Aspire, Cash-In-Asia, INFT and Funding Societies.

  • Angel Investors

Angel investors are seasoned businesspeople or investors who can provide high risk early-stage financing to help start-ups as a hobby.

Simple Agreement for Future Equity (SAFE) Notes

SAFE notes are standard documents used by new businesses to help raise seed funding. SAFE notes act as a bona fide agreement to permit an investor to buy shares in the future.

A benefit of SAFE notes is that it reduces the legal cost and the paperwork required for an investment.

Additionally, as companies in the early-stage have little to no financial track records, SAFE notes help to defer the valuation for an investment to when the company reaches a later stage.  SAFE is essentially an agreement to convert the invested amount into equity at an agreed event in the future, which is typically another fund raising round when the company is more matured. Typically, SAFE notes contain a discount, usually  around 20% on future valuation for investors to purchase shares . SAFE also typically as valuation cap in order to safeguard the interest of the investor. A SAFE may have both a discount and a cap, at which the SAFE will convert into equity at the lower of the discount or the cap.

2. Growth Stage Financing

When start-up companies have reached the growth stage, this indicates that the business and the product has proven itself. Therefore, there is a good product-market fit and the business now plans to further scale its production to serve the larger customer base they have acquired.In this stage of business, here are a few examples of growth stage financing opportunities.

  • Bank Loans

Now that the company is in a position where it has a financial track record, the likelihood of receiving a loan from the bank to use as working capital or capital expenditure is much higher.

  • Account Receivables Factoring

Factoring is a financial transaction in which a company sells its receivables to a financial company (called a factor). The factor collects payment on the receivables from the company’s customers. This helps companies free up capital that is tied up in accounts receivable and allows companies to receive cash quickly rather than waiting for the duration of their credit terms.

  • Venture Capital

A venture capitalist  invests in a business that has long-term growth potential in exchange for an equity position in the company. Venture capitals typically are in search of high risk technological start-ups looking to disrupt industries. For those planning to pitch to venture capitalists, an innovative technology product and a potentially huge addressable market will be important to prove the viability as a potential investment.

  • Private Equity

Professional investors are primarily interested in making returns from growing a business (by raising company value in the form of improved financial performance or financial engineering. Private equity investors can invest via equity or convertibles.

  • Strategic Investors

Strategic investors are typically larger companies in related industries with the primary aim of gaining value to their operating business via an investment in  your business and creating a return on their investment through capital gains or dividends is often only a secondary objective.

Why A Company Would Need Early-Stage Funding

An entrepreneur who aspires to grow does need not only a good business idea but also enough funding. Research shows that inadequate capital is a common reason behind small business failure. The following are reasons why a starting business should get financing.

  • Funding helps entrepreneurs to solidify their base. You can strengthen your firm by hiring more staff, capitalising on production costs, etc.
  • When the market perceives your business ideas well, you tend to aim at securing a larger audience.
  • With proper funds, a firm can increase its production and sales. Also, it can compete well with the prime players in the market.
  • The basis of looking for investors is to get funds. But investors can also help you get deals with other corporations.
  • Looking for funds makes a business more visible and intrigues investors to your side.

Reach Out to Sprout

Whether you are raising funds or sourcing for investors, Sprout can help you manage your daily administrative tasks with ease. Sprout also offers professional accounting services from our team of chartered accountants to handle your finances. Allow our experts to guide your company in the right direction! Check out our budget friendly packages and feel free to contact us with any queries, we’ll respond within 24 hours.