New Venture Financing

New Venture Financing

Introduction

The structure of Venture financing could be through various different kinds of securities that ranges from straight debt to debt along with features of equity i.e. convertible debt or warrants debts or common stocks. Both sources of finance have certain benefits and drawback to the investors as well as to the entrepreneur. The circumstance and current forces of market characteristics will determine the form and mix of security which will be suitable for a new venture.

Discussion

Funding decision of a new venture offers the entrepreneurs with alternatives that are related to the composition of the capital structure of the firm. The challenge faced by the new firm is acquiring timely, sufficient and appropriate financing. This is the main obstacle which demands for efficiently navigated through the entrepreneur of the new venture owners (Peter F., 2001).

Type of Securities

The following securities have been selected for new venture financing.

Senior Debt: This debt is for the long term and this is usually for higher risk companies or in some special situation such a financing an equipment for Mobile Auto Detailing. This debt will be acquired from leasing agencies or other financial institutions.

Sub- Ordinate Debt: This is used t acquire financing from financial institutions and these are generally convertible in to common stock or go together with warrants for purchasing common stock. Senior lender regard subordinated debt as equity. This also enhances the fund amount which could be loaned which results in higher leverage.

Preferred Stocks: These are generally converted into common stocks. The cash flow of venture assist since there is no fixed loan or payment of interest requires to be paid until and unless preferred stocks are redeemable or payments of dividend are compulsory. The improvement in debt to equity ratios is due to the issuance of preferred stocks.

Common Stock: This is generally the most valuable with respect to the ownership percent that is contributed to the venture capitalists. Moreover, in order to improve the cash position of the company i.e. cash flow has limits the debt amount, sales of common stock is the most feasible substitute.

As each of the suggested securities comprises of unique features, it will provide beneficial return to the company, as mixture of debt and finance is preferable rather than entire equity or entire debt financing (Kathleen R., 2011).

Debt to a Venture Capitalist

There are three main returns, if debt financing is considered from venture point of view.

There would be a higher probability that the venture capitalist would obtain their principle back along with at least partial return. Majority of the companies in the venture capitalist, their average portfolio is pertained as the living dead that can be said that there performance constitute to be deteriorating and unsatisfactory. In few circumstances, these companies have ability to make payment along with interest, although they have partial plea for potential public and acquirers.

In few cases, this debt acquiring place new venture in a better position which entirely influence the ...