10 Most Common Ways to Finance Your Business

10 Most Common Ways to Finance Your Business

In Finance by Calistus OziokoLeave a Comment

An important factor to consider in addition to the factors that affect your choice of pharmaceutical plant location is finance. As an entrepreneur, you need money to either venture into a new business or to expand the operations of your existing business. Raising capital for your business can be a challenge and a barrier to the eventual commencement and implementations of your business. While sourcing for fund, you need to first of all identify how much you need to start or grow your business.

See also: How to identify your capital needs for a business”

Below are many varied paths you can source funds to finance your business.

1. Personal savings/ Owner’s fund/ Owner’s equity

This is the most preferred source of fund for most businesses. It includes inheritance or personal savings generated or saved from your previous endevours. The volume of money available for use depends on your income, your ability to save and to consume and the level of taxation. This source of fund constitutes no liability to your company and it is usually interest free.

2. Family and friends

This is the next most common sources of funding after personal savings. This is the money you receive from wealthy family members or friends. The good thing about this source of fund is that your family and friends can assist you without being worried about quick returns.

3. Bank credit

Banks provide the major source of fund to businesses with overdraft and term loan being the most popular bank credit open to both new and existing enterprise. The problem with this source of fund is that banks usually require collateral and the interest rate is usually high. Every entrepreneur at some point in his business career will seek a bank loan. It is usually advisable to buy company assets with bank loans instead of using it as the operational cost of your company.

4. Partnership

Partnership in its simplest definition is a legal form of business in which two or more individuals share the management, profits and liabilities of a business venture. With a view to expanding the capital base of a new venture, you may decide to take on a partner or partners. Partnership is governed by “Deed of Partnership’ which spells out how profit and loss should be shared, and each partner’s involvement in the enterprise. Partnerships come in two varieties: general partnerships in which the partners are personally responsible for the liabilities of the enterprise and limited partnerships in which personal assets of partners are protected from any financial claims of the firm’s creditors.

5. Money lenders

These are individuals or group of individuals (distinct from banks and financial institutions) who offers small personal loans at high rates of interest. Make sure you fully understand the terms and conditions of the contract before you borrow money from them. Some money lenders give conditions that look sweet but dicey. Some contracts are also constructed in such a way that you end up losing your company if you fail to meet up with the terms and conditions.

6. Angel investors

Angel investors also called Equity investors are individuals with lots of money who provide capitals for business start-ups. They are interested in businesses with promising growth potential. You are required to share ownership and control of your company with the angel investors. The extent to which they will demand ownership and control of the company depends on the amount of money they invested in your company. You need to be careful not to be pushed aside in your own company. This usually happens when the angel investor has sufficient money for your type of business and invested more than you did. You may still allow the angel investor to have a larger share of ownership if you desire to exit the business in the short term. Since the idea and passion is in you, some smart investors may still want you to run the business despite the fact that they have majority share. They may appoint amongst themselves a chairman who is either the highest shareholder or someone with a better experience in the field of the business they invested in to help you run the business.

7. Venture Capitalist

Venture capitalists are group of wealthy individuals, government assisted sources or major financial institutions who has a dedicated pool of capital and makes it available for the expansion of businesses with great profit potential. They hardly invest in new businesses unless there is a significant profit potential which can be identified and measured. Sourcing fund from a venture capitalist is a good idea because you get money that does not have to be repaid. Banks may be more willing to extend credit to your business because the money invested by the venture capitalist is equity. It is good to note that the venture capitalist may demand control over your business.

8. Customers

This source of fund is only feasible if you have consistently built an excellent reputation in your field of business. Your customers can help finance or partially finance your business by making advance payment for goods. You can equally encourage cash payment instead of giving the customer goods on credit. You can also generate funds by granting cash discount to customers who make early payments.

9. Trade credit/ vendor credit

By negotiating a deal with your suppliers, payment for raw materials or goods supplied may be deferred to a future date. This enables you to use the income generated from the sales of the goods manufactured to pay up your debt instead of borrowing to do so. The success and availability of trade credits depends on the track record of your enterprise and the willingness of the supplier to part with his goods for several weeks before you finally pay up. You should know that suppliers who agree to supply goods on credit might not do so at the lowest price in town.

10. Grants

Grants are non-repayable funds bestowed by a government or a private non-profit organization/foundation (grant makers) to an eligible recipient (grantee). Competition for grants is usually heavy but you can obtain grants if your enterprise will have positive social impact, benefiting not just you but also the entire community. Grants may not necessarily come in the form of money but may come in the form of fixed asset. For instance, land where the business/factory will be located or equipment.

Conclusion

You should bear in mind that the viability of various funding vehicles may vary over time as the economic climate shift. Capital requirements for your business at different state (growth condition) and stage need different funding vehicles, all with different rules and steps and yet similar in many ways. Making the best choice that suits your business financial need is of paramount importance to your enterprise. As an entrepreneur, it is advisable that you first of all determine how much your business really need before sourcing for funds. This is to avoid borrowing too much money or less than you really need as both are not healthy for your business.

References

  • Small Business Development Centre (2013). Capital Opportunities for Small Businesses: A Guide to Financial Resources for Small Business in North Carolina. North Carolina: The University of North Carolina’s Small Business and Technology Development Center (SBTDC).

The title of this article is Common Ways to Finance Your Business

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