Entrepreneurial finance is the process of making financial decisions for new ventures (i.e. startups). New ventures are inherently different from established ventures, as are entrepreneurs inherently different from conventional business managers. The financial decisions faced by each are starkly different as well.
Entrepreneurs face very different finance challenges than do corporate managers. The most obvious, which most entrepreneurs are familiar with, is “financing." To the average entrepreneur, this means simply "finding money.” It is this process of finding investors that tends to consume nearly all of the focus of most entrepreneurs. While extremely important, it is not the only financial decision that an entrepreneur faces, as this blog by Randolfe notes.
Also noted by Randolfe: corporations can sell financial claims (capital stock) in the public market at market rates. They can also often fund projects through allocation of internally generated funds. New ventures, on the other hand, do not have a market for their financial claims, and thus must raise funds for projects from investors.
Small Biz Trends notes the four following points on this topic:
1. Seeking outside financing isn’t worth your time. Unless your business has a lot of hard assets that can be used as collateral for a loan, or one of a handful of startups that has the super-high growth potential and exit plan to attract accredited angel investors and venture capitalists, seeking outside money is unlikely to be fruitful.
2. Personal credit matters. Data from the Federal Reserve’s Survey of Small Business Finances shows that the owners of one quarter of corporations less than five years old, and nearly half of sole proprietorships that age, personally guarantee the debts of their businesses. With personal debt, the lender’s decision depends less on the potential of the business than on the entrepreneur’s credit and collateral. If you don’t have great personal credit and you have few assets to pledge against a loan, you will have a hard time borrowing to finance your new business.
3. You are more likely to get a loan. Only a tiny percentage of startups are financed by selling equity to accredited angels or venture capitalists. The statistics show that around 1 percent of companies get their financing from these two sources combined. Research shows that these sources are actually more likely to lend money than to take an equity stake.
4. Tapping trade creditors is where your odds of obtaining financing for the business itself are highest. According to analysis of the Federal Reserve’s Survey of Small Business Finance, next to having a checking account, trade credit is the most common financial tool used by small businesses.
In conclusion, the matter of financing for a startup is not the only issue that distinguishes “entrepreneurial finance” from other more mature forms of business finance. We highly recommend you look into the matter carefully and conduct your own research to learn about other financial realities faced by the entrepreneur when contemplating a start-up.
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