One of the main problem facing small businesses is financing. It often creates uncertainty as money is needed to start and also prolong the life of any venture. Apart from self financing there are a number of options to consider when thinking of financing your business. Lets look at some options:
Owner financing
– Your own savings or current shareholders capital, if others are involved in the business.
Overdraft financing
– Talk to your bankers about overdraft financing. Don’t wait until you need it, make arrangements beforehand.
Venture capital
– This is finance provided by outside investors to new or emerging businesses or businesses that have potential but for some reason are failing. This is usually high risked investment, as in addition to equity, venture capitalists may want preference and loan stocks. The returns however, can be high for the business owner. The barriers for qualification are very high so you have to do your research beforehand to ensure that you don’t waste your time. Also, be aware that with this option you could very well find yourself feeling like an outsider in your own business; venture capitalist will invest handsomely in your business… and they will want to run it. If you go this route make sure you understand what you are giving up and that it is a decision you are comfortable with.
Creditors
– Establish a good relationship with your creditors. Creditors will often give you allowances and extensions for payments – this means you could use cash in hand for other important needs or investment.
Hire purchase
– Acquiring assets on hire purchase will mean that you will have more capital available for immediate business investments, purchases etc. When you pay by cash, yes, you will acquire the asset cheaper since hire purchase carries interest, but then you will not have that money to spend immediately. With hire purchase you would be paying a manageable amount monthly and once payment is complete the asset is yours or rather the business’.
Leasing
– Leasing is similar to hire purchase, except the ownership of asset does not change hands. Many companies do leasing, especially for heavy-duty machinery and equipment. It is highly likely that you will be able to negotiate favourable terms for maintenance. Lease rentals can also be treated as a trade expense and as such can be deducted from taxable profits, which is a plus for the business.
Credit unions
– Unlike other financial institutions, credit unions often are willing to give loans to members, applying less stringent rules than those of established commercial banks.
Business angels
– A business angel (often called informal investor) is a private investor who invests in emerging or new businesses, usually contributing money and experience to the venture. Unlike the venture capitalist, the business angel will usually take a smaller investment option in the business. They will usually invest in a company with potential for growth, in an area they have experience in and one that is geographically close.
Finance from profits
– If you want your business to grow you should put aside profits for future investment plans, whether for buying new equipment, employing a larger workforce or achieving other means of growth. This is really good business practice.
Debt Financing
– Financing working capital or expenditures by issuing bonds, notes or bills to investors for money. You then become a creditor and will have to repay the principal borrowed within a specified time plus interest at intervals.
Note: The main thing to consider when seeking debt financing is that you don’t expose the business to high financial risks.
With banks the money borrowed would be secured against your business’ assets and you usually have to pay periodic interest rates on sums borrowed. If you default on your payment of interest or capital the bank can place your company into receivership.
With equity financing the investors accept risk of failure if the business defaults, they also participate to keep the business going and to ensure that sales volume and profits are increased.
Financing is a critical issue. If you are not careful you could end up losing control of your business, in order to secure capital. Always do your research and before you sign any agreement, make sure the terms of agreement are clearly and fully explained and understood and that you can live with those terms.
It is also advisable to get the opinion of a lawyer who will likely explain the things the other party might choose not to.
