Capital is a spring-board of any business. It is one thing to identify business opportunity, it’s another thing to mobilize capital to start the business. Success of every business largely depend on the amount of capital available to executive the business. Getting fund for a business can be so difficult. When entrepreneurs are not able to raise the needed capital to either start or grow their businesses by themselves, they look for investors. Investors can invest in different ways whether as equity investment or credit investment.
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Equity Investment: In equity investment, the investor takes part of the equity shares of the business and also take part in profit and loss sharing in the business
Credit Investment: The investor provides capital for the business in form of loan and the capital is paid back to him in future with interest whether business makes profit or loss.
Business capital funding can be in form of physical cash or materials. Investors can choose what they will contribute whether investment is equity investment or credit investment.
Business finance is mostly needed to acquire material resources for the business operations, so it wouldn’t be wrong if any investors provide the material resources needed, so long as the material resources have quantifiable monetary values. Business plan usually state the needed fund, the resources the fund will be used to acquire and with their estimated costs. The investors may choose to contribute by providing those materials.
There are 3 major reasons investors prefer to contribute resources than money.
These three reasons can be classified into two:
- Risk management
- Cost saving
Risk Management Strategy
Investing in another person’s business or business idea is risky, as such the investors deploy different risk management strategies to prevent lost of investment.
To Avoid Diversion of Funds: Some investors are skeptical to giving funds to startup entrepreneurs or small business owners. This is not without a reason. They feel the funds can be misappropriated. There have been stories where start-ups and small business owners were given funds to either start or expand their businesses, they ended up using the funds for personal use or invest in a different business other than the one capital was provided. Some self-acclaimed entrepreneurs are fraudulent, they present business idea in pretense to get money without intention to do the business. For that reason, most investors prefer to provide the material resources to avoid diversion of funds to other things or for personal use by the entrepreneur or management of the business. For instance, if your business is crop farming, investors may choose to supply the seeds and seedlings, inputs, equipment.
To Guard Against Loss of Investment: When investors provide material resources, in an event the business fails, the material resources can be sold for them to recoup at least part of their investment. If material resources are fixed assets like landed property, operational equipment, they can be converted to cash at the time of winding up of the business.
Cost Saving Strategy
To cut cost of moving the money and then to purchasing of the equipment: For instance, if the investor is to transfer cash to the promoters of the business, there will either be bank or transfer charges. Some materials needed for the business may be at the disposal of the investor, he would rather supply the materials than providing cash. Sometimes, the entrepreneurs inflate the costs of the equipment needed for the business in their business plans.
As an entrepreneur who is sincere in your business, give your investors the choice to choose how they can invest in your business so long as what they are bringing to the table is needs for the success of your business.
