What Are The Three Types Of Capital Needed For A Start Up A Company?

Types of Capital for Start-Up Companies and the Bu
Understanding Equity Capital
A business investor is going to be more interested in owning equity capital rather than being a part of debt capital.  Equity capital or financing is money raised by a business in exchange for a share of ownership in the company. Ownership is represented by owning shares of stock outright or having the right to convert other financial instruments into stock of that private company. Two key sources of equity capital for new and emerging businesses are angel investors and venture capital firms.

Typically, angel capital and venture capital investors provide capital unsecured by assets to young, private companies with the potential for rapid growth. Such investing covers most industries and is appropriate for businesses through the range of developmental stages. Investing in new or very early companies inherently carries a high degree of risk. But venture capital is long term or “patient capital” that allows companies the time to mature into profitable organizations.

Angel business investor and venture capital is also an active rather than passive form of financing. These investors seek to add value, in addition to capital, to the companies in which they invest in an effort to help them grow and achieve a greater return on the investment. This requires active involvement and almost all venture capitalists will, at a minimum, want a seat on the board of directors.

Although investors are committed to a company for the long haul, that does not mean indefinitely. The primary objective of equity investors is to achieve a superior rate of return through the eventual and timely disposal of investments. A good investor will be considering potential exit strategies from the time the investment is first presented and investigated.

Differences Between Debt and Equity Capital
Debt Capital: Debt capital is represented by funds borrowed by a business that must be repaid over a period of time, usually with interest. Debt financing can be either short-term, with full repayment due in less than one year, or long-term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business and debt obligations are typically limited to repaying the loan with interest. Loans are often secured by some or all of the assets of the company.

Equity Capital: Equity capital is represented by funds that are raised by a business from business investors, in exchange for a share of ownership in the company. Equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time.

Angel Investors
Business “angels” are high net worth individual business investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses. These self-made investors share many common characteristics:
• They seek companies with high growth potentials, strong management teams, and solid business plans to aid the angels in assessing the company’s value. (Many seed or start ups may not have a fully developed management team, but have identified key positions.)
• They typically invest in ventures involved in industries or technologies with which they are personally familiar.
• They often co-invest with trusted friends and business associates. In these situations, there is usually one influential lead investor (“archangel”) those judgment is trusted by the rest of the group of angels.
• Because of their business experience, many angels invest more than their money. They also seek active involvement in the business, such as consulting and mentoring the entrepreneur.     They often take bigger risks or accept lower rewards when they are attracted to the non-financial characteristics of an entrepreneur’s proposal.

Venture Capital
Successful long-term growth for most businesses is dependent upon the availability of equity capital. Lenders generally require some equity cushion or security (collateral) before they will lend to a small business. A lack of equity limits the debt financing available to businesses. Additionally, debt financing requires the ability to service the debt through current interest payments. These funds are then not available to grow the business.

Venture capital provides businesses a financial cushion. However, equity providers have the last call against the company’s assets. In view of this lower priority and the usual lack of a current pay requirement, equity providers require a higher rate of return/return on investment (ROI) than lenders receive.  Venture capital firms are often composed of a variety of experienced business investors.

The three types of capital needed for a start-up Company are seed capital, Fixed asses financing capital and working capital. The details are as listed below.    Seed Capital :  Seed Capital is short-term financing to cover start-up costs. It is money used for the initial investment in a project or startup company, for proof-of-concept, market research, or initial product development. Also called seed financing or seed money.  Seed capital is money used as the initial investment for a new product or service launch. Seed capital enables businesses to launch a new product or service without depending fully on a business loan. The funds for this form of financing are typically provided by private investors who are looking for a high return on their investment of at least 30 percent. The investors look to invest in an industry with a market of at least $1 billion, and they also want an industry with few competitors for your business.     Businesses that typically obtain seed capital are young companies around one year of age that have not produced a product or service for commercial sale yet. The companies are so new, so it can be difficult to obtain a regular commercial loan that is sufficient for covering all of the related start up expenses. Regular lending institutions also don't like taking large risks in companies, but an investor will take a risk for the hope of a high return on the investment.  There are some things about seed capital that are extremely important for a business owner to understand. An investor often will want partial control of the business, so you have to be willing to give up a portion of your business if you want financing from an investor. Another thing to keep in mind when seeking investors is that you will have to share confidential information about your business with them.      Fixed Asset Financing Capital:  Fixed assets financing capital is a longer-term financing for property, building improvements, equipment or vehicles. The asset being purchased is usually pledged as security for the loan. Fixed assets are assets that are used in production or supply of goods or services and they are to be used within the business for more than one financial year.  Fixed assets represent the company's long term income generating assets and they can either be tangible or non tangible. They include airplanes, land and buildings, plant and equipment, golf courses, casinos, football players, machinery and hotels depending on the nature of the business under consideration.  In order to comply with the accounting standards a company should recognize fixed assets only if it is probable that future economic benefits will add to the company's bottom line and that the costs of the fixed assets can be measured reliably.    Working Capital:  Working capital is one of the types of capital that is required for start-up business and it is utilized for short-term financing to cover operating expenses and to bridge gaps in cash flow. Working capital, also known as "WC", is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. Net working capital is working capital minus cash (which is a current asset) and minus interest bearing liabilities (i.e. Short term debt). It is a derivation of working capital, that is commonly used in valuation techniques such as DCFs (Discounted cash flows).  Working Capital = Current Assets − Current Liabilities  A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash.