Sources of Agriculture Financing

Topics: Venture capital, Debt, Investment Pages: 8 (2272 words) Published: August 5, 2014
Sources of Agriculture Financing

Financing is needed to start a business and ramp it up to profitability. There are several sources to consider when looking for startup financing. But first you need to consider how much money you need and when you will need it. The financial needs of a business will vary according to the type and size of the business. For example, processing businesses are usually capital intensive requiring large amounts of capital. Retail businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain aspects of their businesses may be an option. Also, incentives may be available to locate in certain communities and/or encourage activities in particular industries.

Equity financing
Equity financing means exchanging a portion of the ownership of the business for a financial investment in the business. The ownership stake resulting from an equity investment allows the investor to share in the company's profits. Equity involves a permanently investment in a company and is not repaid by the company at a later date.

The investment should be properly defined in a formally created business entity. An equity stake in a company can be in the form of membership units as in the case of a limited liability company or in the form of common or preferred stock as in a corporation.

Companies may establish different classes of stock to control voting rights among shareholders. Similarly, companies may use different types of preferred stock. For example, common stockholders can vote while preferred stockholders generally cannot. But common stockholders are last in line for the company's assets in case of default or bankruptcy. Preferred stockholders receive a predetermined dividend before common stockholders receive a dividend.

Personal savings
The first place to look for money is your own savings or equity. Personal resources can include profit-sharing or early retirement funds, real estate equity loans or cash value insurance policies.

Life insurance policies -- A standard feature of many life insurance policies is the owner's ability to borrow against the cash value of the policy (this does not include term insurance because it has no cash value). The money can be used for business needs. It takes about two years for a policy to accumulate sufficient cash value for borrowing. You may borrow most of the cash value of the policy. The loan will reduce the face value of the policy, and, in the case of death, the loan has to be repaid before the beneficiaries of the policy receive any payment. Home equity loans -- A home equity loan is a loan backed by the value of the equity in your home. If you home is paid for, it can be used to generate funds from the entire value of your home. If your home has an existing mortgage, it can provide funds on the different between the value of the house and the unpaid mortgage amount. For example, if your house is worth $150,000 with an outstanding mortgage of $60,000, you have $90,000 in equity you can use as collateral for a home equity loan or line of credit. Some home equity loans are set up as a revolving credit line from which you can draw the amount needed at any time. The interest on a home equity loan is tax-deductible.

Friends and relatives
Founders of start-up business may look to private sources such as parents or friends when starting a business. If may be in the form of equity financing where the friend or relative receives an ownership interest in the business. However, these investments should be made with the same formality that would be used with outside investors.

Angel investors
Angel investors are individuals and businesses that are interested in helping small businesses survive and grow. So their objective may be more than just focusing on economic returns. Although angle investors often have somewhat of a mission focus, they are still...
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