What Is Entrepreneurial Finance?

When starting a company, entrepreneurs dedicate the majority of their time to securing the funding to make their vision a reality. This involves approaching investors and seeking loans that can allow them to launch operations and acquire resources. Funding may be provided by friends, family, venture capitalists, angel investors, banks and other sources.

What Are the Types of Finance for Entrepreneurs?

Entrepreneurs must be flexible, savvy and fast-moving to acquire the financing needed to allow them to focus on scaling operations, hiring employees and propelling their business forward. Seeking out money in creative places must be second nature to build and maintain a successful business. Therefore, entrepreneurs should be prepared to explore funding opportunities via business angels, venture capital, bank loans, buyouts and financial bootstrapping.

Angel Investment

Business angels, or angel investors, invest a part of their wealth in innovative companies in their earliest stages to help them grow expeditiously. Unlike traditional investors, angel investors don’t expect a return on their investment unless the company succeeds. 

Venture Capital

Venture capital is a method in which investors fund a fast-growing company with the intention of selling their stake in the middle stage. Venture capitalists take on high risks and expect high profitability when investing in new ventures.

Bank Loans

Bank loans are funding provided by a bank against business or personal credit. This option works well if a founder has a high credit score, allowing them to secure a loan with more favorable terms. Otherwise, a bank may charge an increased annual percentage rate or only offer a smaller loan to a founder with a lower credit score. 

Financial Bootstrapping

Financial bootstrapping is when a founder invests their own money and uses that to propel the business forward, with methods such as joint utilization, sweat equity, owner financing, delayed payments, minimization of inventory and more to keep the business lean.

Buyouts

Finally, buyouts exchange ownership of the company with another party to build its value. Buyouts can only occur once a company attains private status. In many cases, a buyer acquires an underperforming company with the goal of taking it private, leading a turnaround and then having it go public later on. 

What Is the Difference Between Entrepreneurial Finance and Corporate Finance?

Strictly speaking, corporate finance is a set of methods and strategies used to grow the long-term value of a company, encompassing methods such as capital structure, investment decisions, dividends, budgeting and balancing equity and debt. While entrepreneurial finance may utilize many of these methods, the primary purpose of entrepreneurial finance is to gain additional funding and maximize profits, meaning that some of the analysis that is applied to corporate finance may not be applicable here.

For example, entrepreneurs are often willing to acquire additional debt to increase their available funding while larger corporations will look to invest in other smaller companies to increase product offerings or value to shareholders. In more developed startups, it’s important to note that a finance function may cover both corporate finance and entrepreneurial finance responsibilities.

Additionally, many professionals who specialize in entrepreneurial finance often work for venture capitalists and investment funds directly to provide expertise in how organizations plan to attain funding and become profitable.

What Financial Skills Does an Entrepreneur Need?

Starting a company is a major endeavor, so entrepreneurs need to be skilled in the following areas to lead a business effectively: 

• Financial Knowledge: To successfully grow any business, entrepreneurs must possess a strong financial skill set to convince investors to provide funding and transform that funding into tangible growth.
• Credit Literacy: Understanding how a credit rating influences loan eligibility is a huge skill to have, especially when starting a business, as it may be one of the few sources of funding available in the early stages.
• Responsible Borrowing: Along with understanding credit, responsible borrowing is necessary so debt can be manageable once growth begins.
• Investing: Next, finding investors and having the skills to communicate the company’s vision is key to any growth-stage business.
• Budgeting: Finally, knowing how to budget and spend money wisely is critical to the success of a business in both the short and long term.

Frequently Asked Questions