Looking to launch a new business venture or franchise an existing one? Well, proactive entrepreneurs seek a variety of ways to meet their capital needs. Acquiring multiple sources of funds improves the business’ credit worthiness, chances of hitting the target capital, and potential growth. This is especially true for a huge capital base since most lenders will only cover a fraction of the amount needed.
There are a couple of ways to get debt or equity financing. The former involves borrowing funds from people or lending institutions to be repaid over a specified period of time with interest. The latter entails receiving a given amount of business funds from an investor in return for a stake in ownership of the business.
It is critical that a business taps into the right backing. The numerous available options may, however, make it a bit of a challenge when deciding on what to settle for. Read on for an overview of the 8 best sources of capital available, including their eligibility criteria, highlights, and downsides.
- Personal investment
The initial investment of any business must come from the owner, even before thinking of letting others chip in. Diverting your personal savings from other streams of income into funding a business as well as plowing back its own revenue demands passion, dedication, and commitment to the venture. Most times, lenders consider businesses that have already taken the first strides into financing a necessary part of capital requirement when asked to fill a deficit. If you cannot risk personal wealth for your own commercial entity, how do you expect others to buy into the idea?
- Borrowing from family and friends
Good relationships make great avenues for borrowing business capital. Acquaintances, siblings, spouses, and close friends may have no qualms funding a business project for one of their own. Usually, the money is payable in the future once the business becomes profitable. This type of loan also known as love money or patient capital is great for small start-ups as it is pretty flexible, however, little to moderate amounts are to be expected with this type of sponsorship. When a substantial amount of investment is sought, equity becomes a consideration. This arrangement might not work out well, though, and it is likely to strain relationships.
Banks are the go-to financial institutions by small-to-medium enterprises (SMEs) when seeking business loans. It is even easier for loyal account holders who have continuously utilized their services as they even get customized loan products. Nonetheless, as per the realisticloans.com when looking around at the offerings of different banks and credit unions is recommended to find exactly what suits you. It is also worth noting that a business must meet certain requirements, regardless of how lucrative a business idea is or seems. An excellent credit score is one of them. A strategic well- thought-out business plan is another. Banks may also ask for collateral and/or guarantors. Small Business Administration loans are a better alternative for small start-ups with absolutely no avenues for alternative backing.
- Utilizing store and trade credits
Retailers and suppliers may offer a business sales and trade credits respectively, allowing the business to obtain goods or equipment on credit. Repayment terms usually vary, though the majority requires it to be done pretty quickly or else incur high interest after a specified period has passed. It is not a very suitable source of business financing for start-ups, as it demands a solid reputation.
- Welcoming private investment
Giving a private investor equity in your business in return for capital is another way of obtaining business funds. It, however, means that you will be giving away a part of ownership and sharing in profits. The good news is some of these private investors come with perks: much-needed management, industry expertise, and networks to propel a venture to great heights. Angels are a good example of investors worth a share of the business. They are wealthy businesspeople who have been in the game for a long time. They will not only invest in small businesses (up to $100,000) at infancy stages, but will also provide mentorship, advice, and draw in other investors. Venture capitalists are also worth a mention though they finance less than 1% of small businesses in the US. They will invest up to $1,000,000 in high-profile companies in technology and related fields with a potential for exponential growth spurt and high profits. Winning over investors is not an easy task though.
Both government and non-governmental agencies offer grants that small businesses can take advantage of to aid in product development, diversification, inventions, in-depth research, manufacturing, export, etc. Whatever the capacity, this is funding that the business will neither repay nor have to part with a share of the business. The biggest downside with grants is the cut-throat competition from a myriad of applicants seeking them, not to mention the rigorous application process and tough requirements for eligibility.
- Economic development organizations
Economic development organizations underwrite businesses directly and indirectly. Alongside other sources of credit that a business has already secured, these organizations fund deficits, and their interest rates are far much better than those on bank loans. In addition, they also help businesses develop their products in incubation centers before spending even a dime of actual costs. By utilizing the many resources at their disposal such as administrative, logistical, technical, and industrial expertise, businesses in the starting stage significantly lower their costs. Business owners can find out more about the availability of such programs and eligibility criteria from the offices of the Chambers of Commerce. Most of them, however, prioritize technology-oriented business ideas.
- Selling shares to the public
Offering business shares to the public (Initial Public Offering) is another way to raise capital. It’s one of the most favorable ways to raise huge capital quickly. But it is a complex process, and it is unsuitable for small businesses and startups, but great for well-established companies. The success or failure of this method is, however, highly dependent on existing market conditions.
Here is a variety of pertinent questions to act as your guide. How much does the venture need? Is it eligible for a particular loan or grant? Is the projected cash flow sufficient to repay principal and interest? Are you willing to give up a share of the business for funding? What stage of business are you in? Do you have the expertise and strong connections to grow the business?
When it comes to business financing decisions, entrepreneurs cannot afford to go wrong. It is important to spread risks, but it is also imperative that everyone involved carefully evaluates each of these ways of acquiring capital before making the final decision. Whatever capital funding solution an entrepreneur resorts to, it must pay off in the end.
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