For the SME, whether an established firm or a growing business, getting capital is not only crucial for growth but also for the survival and day-to-day operations. But getting these funds from the right source is more important as the choice of the source can determine the future of a business, the course it takes, and eventually the success of the business both in the short and long term.
Cash is King; this means that the person with the cash is King. I believe that money makes money or money attracts money in life and all the more so in business. When it comes to getting funds to start-up, jumpstart, grow, expand, or to save an ailing business, it is not only important to get the right amount at the right time but also to obtain it from the right source.
During the 1990s in the USA, Venture Funding existed as an alternative source of funding and has since become part & parcel of the financial market. It then slowly grew in popularity over the coming years. In the last 10 to 15 years, it’s spread to Singapore in a big way as well.
In Singapore, you can also choose between Venture Funding, the typical business loan and a host of other types of funding available nowadays. This, of course, brings to mind which one is more suitable for your business and also what your ambitions are for your firm depending on your own personal preferences. Business loans are debt financing where you get to retain control of your business whereas Venture Funding is very much equity financing where you give up partial control and share of your business in exchange for funding. There are pros and cons to both types of funding and the following study will give you a better idea to be able to make a better choice in choosing the right fund to suit your business needs.
Venture Fund (VF) or Venture Capital (VC) or Venture Capital Funds (VCF) are terms pointing to the relatively new funding companies which have a unique way of funding businesses and start-ups called Venture Funding. They give the borrower or fund seeker another choice of sources to get funds from for business purposes. It is a type of equity finance that is managed by professionals or Venture Capitalist for their investor clients. The Venture Capitalist’s job is basically to find or choose the right business to invest in by determining the viability of companies and their businesses. As for the investee, he will have to lose partial control and share of his business to the VC in exchange for funds invested into the business. Venture Funding is more suitable for young businesses or start-ups which have great products and services in mind and a great business plan with great potential. At the same time, these businesses are also looking for good business networking, advice, and guidance which can be given by the VC.
The business owner will pay the VC and its investors interest in the form of dividends on shares which are normally and comparatively lower than the interest rates he would pay to service a bank loan in the first one or two years after initial investment begins. VCs are not really on the same levels with banks and other types of traditional lenders but instead, help meet the financial needs of a relatively new and small business that normally, have limited history or have not reached the point where they can secure a loan from a bank. For the same reasons above and to a certain extent, VCs compete with the much newer peer to peer (P2P) platform when it comes to funding.
Banks also prefer giving out secured loans with collateral involved and unsecured loans with personal guarantors which are safer loans with more reliable profitability and place priority on them. SMEs and start-ups on the same note usually do not have the assets to put up as collateral while at the same time, lack data, history, accounting and records for banks to do complete due diligence and credit analysis which further reduces the chances of banks giving out loans to these businesses. All of these tend to make Venture Funding an alternative if not an ideal source of funds for them.
Businesses, whatever industry they are in or whatever size they have grown to, will at some point in time, need an injection of cash into their coffers. As a business owner, you might need funds for a business loan to bridge a cash-flow gap, to jumpstart your fledgeling business, to start up a new firm or to expand your company, etc. So taking up a loan is viable. Business loans create debt for the borrower where the money borrowed can be used in various ways to help the business. However, it does not involve giving up control or shares of any sort to the bank or any other financial institution or entity.
The business loan will have to be paid back with added interest which is often high and according to a schedule of repayments that is prescribed by the bank and agreed upon by the borrower. The business loan can be secured (with collateral) or unsecured (without collateral) and might involve a personal guarantor at times. Banks usually only look at financing SMEs with a minimum of 2 to 3 years operating experience thus often dismiss start-ups as potential borrowers as they tend to have statistically a very short survival rate.
Comparison and Analysis
VCs, besides usually getting a 25 to 30% stake and control in the firms they invest in do, also provide mentorship, technical expertise, marketing ‘know how’, business models, and networking contacts in the fields of the businesses involved by them. They are also very much aware that they may not get their money back from the beginning. They are more interested in having a say in the running of the business and sharing in the profits based on the shares and influence they hold in the firm. Business loans, on the other hand, have smaller percentages of interest normally ranging from 3% to 15% depending on the size of the loan, the risk involved, and if collateral has been put up or not, etc. Furthermore, business loans differ from Venture Funding in that the banks are only interested in the borrower’s assets and ability to make the loan repayments according to schedule. They have no interest in having a share or control over the running of a company whatsoever.
VCs typically invest in high risk/high return ventures, businesses, and projects, where there is high growth potential and is highly sought after. The businesses’ size, assets, team members and stage of product development are of great interest to them too. Small and medium enterprises that are relatively new and not making profits yet as well as start-ups are suitable for equity financing such as Venture Funding as they are considered too high risks by traditional lenders. Most SMEs that are quite well-established and are already making profits do not want to relinquish any control and share their businesses hence preferring taking up debt financing which can come in many forms. Venture Capitalist and equity investors do take an inverse attitude compared to banks when investing in small business start-ups. This is evident by that banks must not allow for more than 3% default on loans while VCs can stomach up to 90% failures in investments. One winning investment out of 10 can cover the capital’s write-down costs of the other nine which failed.
For a business loan, the first step in applying for one is to fill up the loan application form whereas the first step in the Venture Funding process is to submit a business plan. Then if eligible, the application for a business loan will be evaluated based on other documents and information submitted such as three years business accounts, a business plan, credit report, business details, etc. In the case of Venture Funding, if interested, the VC will perform due diligence of its own which includes a thorough investigation of the company’s business model, products, management and operating history, and many other issues.
A VC might take weeks, months or even a year or two to investigate, collect, analyze, evaluate, debate, brainstorm, and verify the accumulated information on a particular business and its market before deciding on investing in it. But a bank loan might be approved in just days if not hours such as the FS Bolt app depending on the loan size and other pertinent inputs as well as the method of application. The VC might start getting dividends from the second year after the initial investment that normally lasts to the fifth year where the quantum of profits would then far exceed the amounts of interest paid when compared to a business loan. The VC usually exits the company they invested in after a period of 4 to 6 years after the initial investment by initiating an acquisition, merger, or initial public offer (IPO). In the case of a business loan, the whole process comes to a finale when the loan is fully repaid. If a company funded by a VC is successful, then the paid out to the VC would be very large over the years until they exit the company. However, if the business fails, then the business owner can have the consolation that he does not need to pay back the investment money which is fully footed by the VC.
However, it is interesting to note that VCs are not interested in knowing long-term financial projections, unrealistic hopes of how the company will grow, the build-up of a large customer base in the short and long term, unreliable profit as well as sales forecasts. Most critically, they are not interested in businesses that are just seeking funds without any guidance from VCs.
Summary and Conclusion
There are over 100 VCs in Singapore currently in early 2018, and the number is still growing. Some of the well-known ones are NSI Ventures, UOB Ventures Movement, KK Fund, Sequoia, Jungle Ventures, Gobi Partners, Monks’ Hill Ventures, HipVan, Dream Labs, and many others. The types of business loan are plentiful too, for example, Spring SME Micro Loan, SME Working Capital Loan, BizMoney, Business First Loan, and BizPower SME Business Loan, not to mention other business loan types from other financial institutions. Venture Funding and business loans are different from each other and indeed do not clash but instead complement each other. They both serve various markets and add to the variety of funding sources available to Singapore’s business world.
So for the business owners whose business is already making money from a developed product or service and wants to maintain full control and share of his firm, it would be wise to take up a business loan. As for start-ups who have little or no track record yet, but do have a fantastic idea, a brilliant business plan, great products and services with continuous market demand, promising ROI, and an immensely capable team, Venture Funding might be ideal for them.
If both options are not the preference of the business owner, there is a third option where the Venture Fundings and business loans available might not be able to give you the flexibility and speed of application such as the FS Bolt app. Developed by Funding Societies, FS Bolt gives you a loan quantum of up to SGD100, 000 with up to 2 hours approval period. There is no collateral needed and you will get your loan disbursement within 24 hours!
Therefore, choosing funds from the right source is applicable if not vital for the future of your business.
Funding Societies – Capital Markets Services License No: CMS100572-1 issued by Monetary Authority of Singapore (2016)