Acme Inc. External Financing Alternatives

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Financial Alternatives available to ACME.
Debt
Debt is a formal arrangement between your business and a third party to borrow money. The amount borrowed is called the principal. Such an agreement usually requires Acme to repay the principal plus interest at some future date.
Businesses use short-term debt such as an overdraft facility to overcome intermittent cash flow shortfalls. Long-term debt, such as mortgages or debentures, is used to acquire assets.
Another type of long-term debt is a convertible note. This requires Acme to issue shares to the third party in lieu of money. Interest is usually charged while the principal remains outstanding. Such debt instruments can look very similar to equity.
Lenders consider risk and capacity to pay interest and repay the principal when they assess loan applications. Their assessment is based primarily on Acme's track record and asset base, with growth potential a secondary consideration.
Usually debt must be secured against the Acme's assets and very commonly must also be secured against the assets of the Acme's owner, called a personal guarantee.

Debt collection agencies
These organisations can help recover outstanding debts from your customers. The agency typically charges a commission based on the gross sum of the debt collected. The commission rises with the age of the debt.

Equity
Equity finance is the sale of a share in the company to a third party. The third party becomes an owner of Acme.
Equity can be provided by individual investors, venture capital companies, joint venture partners, and the 'sweat equity' (this is intellectual value and owners' equity) and capital contribution of the founders of the company.
Equity providers are more interested in the growth potential of the company. Their objective is to invest an amount now and reap the rewards of a 5 to 1, or even 10 to 1, pay off in three to five years.
Since investors have different objectives to lenders, the factors they evaluate in determining whether to invest are also different.
Growth potential is based on the quality of the Acme's management, product brand strength, barriers of entry to competitors and size of the product's market.
Types of equity providers and options available:
· Corporate partnering
· Business angels
· Angel syndicates
· Venture capital funds
· Corporate venture capitalist
· Initial Public Offering (IPO)

Export Finance Insurance Corporation (EFIC)
EFIC insures against the risk of non-payment, giving companies the confidence to offer more competitive payment terms to their overseas customers. Other services include various forms of debt finance.

Factoring
This is the act of selling your accounts receivable to a third party at a discount. This means the third party takes on the risk and costs of collecting debts. The main advantage to Acme is the reduction in administration and risk with immediate cash returns.

Friends and Family
Raising money from family and friends is a common way of funding a new business. In some cases, it may be the only way of obtaining funding on reasonable terms, either because you have no credit history, Acme model is completely untested or you want to maintain secrecy about your plans.
While this source of funding is often easy and quick to obtain, before taking money from family or friends you must consider the risks. What if your company is not as successful as you first thought? How will this affect your relationship with family and friends?
Be sure you are making a business decision and never take money from family and friends when the amount being invested is a relatively large amount for that person. You should ask your lawyer to prepare a short form agreement setting out ...