Types Of Financing A Business – Funding Stages
Money is the lifeblood of any business. It is the fuel that any company needs at any stage of its existence. No matter how big it is, no matter how many workers are employed, any venture needs financing to stay operational. In this article, we will go through the different stages of financing and see the different ways businesses obtain their money in their life cycle.
Seed Funding Stage – this is the very first stage of financing, in which the business may not even be founded yet. This is the money used for actually starting – building the product, making the needed researches and pitting all thing in motion. These are usually funds from personal savings, crowdfunding, angel investors, etc. This is the riskiest financing stage, because the business may not even exist.
Start-up financing (series A) – This is in many cases the first external financial injection. in this stage, the business is operating and needs money for marketing expenses, more employees, and management staff. The products/services are improved. This type of funds is usually provided by venture capital companies.
Series B (C, D,…) – These are like the series A financing but a second (third, fourth…) round of it. This funding is provided by venture capital firms and angel investors in exchange for equity.
Working Capital Financing – in this stage the company is growing rapidly, the business is stable and this is why usually this type of financing is provided by credit institutions like commercial banks. The company needs money for its daily operations. No investors participate in this stage and no equity is sold for capital.
Mezzanine Financing (bridge stage) – in this stage the business is expanding rapidly and needs funds to do this. The internal sources of money are not enough for the growth and the company may issue preferred stock or subordinated bonds. This type of funding is usually provided by investment banks.
IPO (Going public) – This is the last financing stage – when a company makes an initial public offering (IPO) of its common shares. In this case, anyone could become an investor by buying company shares on the market.
It is very important for every company to take advantage of the appropriate type of funding. Many businesses rely only on internal sources of financing, which tremendously limits their potential. Others go for an IPO too early, which limits the amount of public offering financing.
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