If there were only two things that could cause a company to fail, they would be inadequate management or planning and inadequate financing. It is impossible to overstate the significance of financing your business. Contrary to what some may believe, financing the business is not a one-time event. It is required at all times, including when expanding, modernizing, and so on. At this point, you must recognize the significance of extreme caution and plan capital utilization. A bad choice here can have a lasting impact on your company.
Do you really want to raise money from outside sources?
It is understandable that starting a business requires borrowing money. But what about upgrades and expansions? Before you apply, make sure that external financing is absolutely necessary. Organizing your finances is essential during transitional times, but only after you have established that you will be unable to do so on your own, either permanently or for some time. The criteria for risk, the cost of not financing, and how well it contributes to the company’s specific and overall goals are equally important.
Supporting Sorts
Value Supporting: Equity financing entails giving away a portion of your ownership and rights to profits in exchange for cash and the (mostly partial) sale of your shares. Venture capitalists or private investors can provide equity financing. Proper capitalization results as a result, facilitating access to debt financing. Unlike loans, equity finance does not require repayment unless your partner withdraws.
Financing Debt: Loan financing with a guarantee of repayment is known as debt financing. A promise, collateral, or personal guarantee are all options for the guarantee. Debt financing is only available for real estate, equipment, or inventory by lenders. The rule of thumb for structuring the debt is to use long-term debt for loans for fixed assets and short-term debt for working capital. The reason for this is that fixed assets have lower interest rates than working capital loans and generate cash flow over their lifetimes.
Financing Options:
Depending on your circumstances and the amount required, you can select financing options.
1. Friends and Family: Using your own resources or friends and family, you can quickly finance short-term and small working capital needs. The absence of the interest component (mostly) is the advantage here. Even in the beginning stages of a business, this method of raising funds is useful. However, you should be aware that disagreements over money are the primary cause of strained relationships.
2. United States Small Business Administration: The most common source of debt financing is this. The SBA organizes and guarantees loans through a variety of lenders and sources that fall under its umbrella, rather than lending money directly. Banks, private lenders, local governments, etc. loan businesses that have been approved by the SBA right away. SBA loans are available at the lowest interest rates for a variety of business purposes.
3. Investment capital: Organizing financing through the sale of shares with a value equal to the required financing is called raising venture capital. Basically this implies selling a part of the proprietorship and control freedoms. Before closing the deal, it is absolutely necessary to conduct an accurate valuation of your company’s value.
If you have established your credentials as a competent manager, have collateral/assets, a convincing cash flow statement, a genuine need, a demonstrated track record, good credit, and a robust plan, financing a business shouldn’t be difficult. This should not only prevent your company’s demise but also enable it to expand and achieve success.
