How To Choose The Best Source of Finance For Your Business

In the course of running a business, entrepreneurs go on to look for more funds to either expand their current operations or tide over a short-term cash crunch.

Traditionally, there are two ways of achieving your objective. One is to agree with the lender to offer the amount you need as a debt. The document that is agreed to and signed would clearly spell out the terms and conditions of the arrangement. These could include the mode of repayment and the specific period and interest charges that would be accumulated in the process. There is however one important advantage of opting for this option: You still retain the ownership and control of your business. But this mode of finance also has an inherent drawback, because if you become bankrupt, your collateral would be liquidated.

Another way to obtain the funds you need to run your business successfully is through equity. In this mode of finance, you look for a potential investor who shows interest in your business. This financier will give the sum of money you require and in return, he/she will ask for a stake in the ownership of your business. The most important advantage of this method is that you don’t incur any debts. However, you lose full control over managing your business independently.

When a decision is to be made in the future regarding your business operations, you’d need to consult your investors to secure their consent before moving forward.

See Also: How To Get Bank Loans In Nigeria With and Without Collateral

How Then Can Entrepreneurs Choose The Right Source of Finance For Their Business?

Choosing the right source of finance can be a difficult task for any entrepreneur. This is because most entrepreneurs only have a few options to choose from, as almost all sources of additional capital fall under the general categories of debt and equity. However, each of them has its own set of specific requirements which entrepreneurs need to accept or reject. This is why industry experts consider it a time-consuming process.

To make a good decion, here are 5 important factors entrepreneurs should consider in choosing the right source of finance for their business:

1). Risk:

Every external fund contains an element of risk and entrepreneurs have to decide whether they are willing to take it on or not. They have to forecast the worst-case scenario and determine the best decisions to make, else they could end up ruining their reputation in the market.

See Also: How To Secure Commodity Trade Finance For Your Import/Export Business

2). The Overall Cost of Securing The Funds:

Entrepreneurs need to realize that almost all external funds available in the market are not cheap. There is a cost they need to incur for using this money to run their business, and so, entrepreneurs need to ensure the expenses are within their acceptable limits. Otherwise, they may end up losing revenue.

Asides paying off the principal amount, entrepreneurs need to consider brokerage and interest charges. And even if they were to issue equity shares in the market, they would still have to incur regulatory costs.

3. How Much Is Required:

When entrepreneurs know exactly how much they need in finance, deciding what type of external finance to go for becomes easier.

For instance, if entrepreneurs intend to buy equipment that can generate revenues for their business, they can opt for an asset finance loan from a reliable financial institution, as the equipment itself will stand as a collateral.

On the other hand, they may need money to overcome cash flow problems, which would mean they put up a collateral to enable them to secure a bank overdraft.

See Also: 5 Ways To Finance Your Small Business

4). Purpose of The Fund:

The income from whatever the fund is required for must be enough to repay the loan and make the business profitable.

If the purpose of the loan is to carry out a capital project like constructing a factory, a long-term loan from a financial institution is the preferred option. On the other hand, if it is for current expenditures, it is better to opt for a short-term loan.

5). Control:

Control is another important factor which influences an entrepreneur’s choice of funding.

If an entrepreneur opts to give out shares in his or her company, they would have to forgo part-control over their organization to the investor. And depending on what is agreed, the investor may insist on having a significant say in the decision-making process.

However, if an entrepreneur wishes to retain full control of his/her business, taking a loan may be the best option.

To Sum It Up

Entrepreneurs need money in almost every stage of their businesses. However, many of them may not have enough cash at their disposal and a shoe-string budget is not likely to take them very far. This is why they need to rely on upfront business funds. However, choosing the right source of finance is always a challenging task. After all, the growth of their establishments and the expansion of their market operations depends on this decision.

About The Writer

This is a guest blog post written by John Bell. He is a skilled business consultant and Financial Adviser.

Note: This article has been edited for style and substance.

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