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What You Need to Consider When Financing Your Business

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Starting your own business is a huge goal and responsibility. Nonetheless, it can be the most exciting thing you’ll ever do. You’ll need financing, though, and that’s one of your biggest concerns right now.

How do you go about financing your business? What options do you have? And what should be your biggest considerations? This article will answer those questions. Read on to learn more.

Source of Financing

The first thing you should consider is the method of financing. In the past, small businesses had limited sources of financing. Today, if you’re a business owner, you have multiple choices. Mainly, though, you’re choosing between spending your own money or borrowing from lenders and banks.

Money
Photo by Josh Appel on Unsplash

Your Money

The fastest way to finance a business is to take the funds out of your pocket. You can use your assets such as bank accounts, investments, and others to do this.

However, most people don’t have a sufficient amount of money to completely finance their businesses. So, they finance the downpayment for the business and then seek the help of lenders.

Bank Business Loans

As the name suggests, you take out a loan to finance your business. You must, however, meet strict requirements for the bank to approve your loan.

Banks that offer business finance UK let businesses borrow a lump sum that you’ll pay over some time. Again, you must meet strict requirements. One such requirement may be that you have enough assets in your name to pay for the loan in case your business fails.

Other alternatives to these two include:

  • Angel investors – investors who will invest in your business early on
  • Invoice factoring – you use unpaid invoices to generate quick cash
  • Cash advance – you sell your future credit and debit card sales in exchange for capital
  • Crowdfunding – you pool investments from several investors to receive a financing boost

Your choice of funding will affect your business not only in the beginning but also for the longer term. Generally, the best option is always the one that you completely understand.

Dig into each of the next consideration to gain a fuller understanding of your choices.

Repayment Terms

Before financing your business, think about the obvious question: can you get back the cash you’ll spend? If yes, when and how fast? This consideration is particularly important if you’re thinking of a bank loan.

Think about your current or expected profit or loss and cash flow. Look at how much your business will benefit from the loan versus the possible downsides you’ll encounter.

Associated Costs

Calculate all the associated costs with the financing methods. For loans, these costs may include:

  • Interest rates
  • Origination fees
  • Brokers’ fees
  • Premiums

Different methods carry different costs. For example, venture capitalists often do not require repayment for years. However, they may expect you to pay them a steep premium at once. Meanwhile, using stocks to finance your operations may lead to a change in management and changes in strategies.

Financing Requirements

Along with banks, other lenders also impose strict financing requirements that you must meet before getting the funds. If you can’t meet a bank’s requirements, you may seek other lenders with requirements you can meet in full.

Common requirements include credit score ranges and business ratios (debt-to-equity ratios, interest coverage ratios, etc). Lenders may also ask you to provide a detailed business growth plan.

Accounting and Finance

Lastly, you must also consider your accounting and financial reporting process when you kickstart the business.

An accurate and reliable accounting offers you a clearer picture of how well (or badly) your business is doing. Without it and proper financial analysis, you will not get a full picture of what’s happening to your business.

 
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