Fundamentals of Business Funding
Whether you are just starting up your business or have been operating your business for a few months or years, it’s always a welcome development to have an additional source of business funding. It is unfortunate however that some business ideas do not materialize into a real concern and that several companies have shut their doors because of difficulty finding funding sources to augment their cash needs until the money arrived.
When you are just starting up a business, it is often difficult to get the initial financing for your business, as most entrepreneurs usually require solid proof that your business concept would actually work, even if you already have an outstanding business plan. Similarly, small businesses already in operation have to undergo some rigorous process and documentation requirements when seeking for some business working capital that can be utilized for such things as physical facilities, inventory, merchandising and other operational expenses.
Considerations of business funds
Small business owners needing quick access to a fund source can explore the flourishing business funding industry eager to provide business loans. When exploring various funding options, you need to consider some very important factors.
- Determine whether you need the fund for a long-term or a short-term period.
- Identify how quickly you can settle the obligation and how much potential return you can derive from your loan.
- Be clear about the purpose of your fund—whether it will be used for any capital expenditures such as equipment or other assets or if the fund will be used to augment the operational needs of your business.
- Evaluate whether you need all the funds you are seeking in full or it can be spread out in smaller amounts over several months.
- Calculate how much it will cost you for each alternative business loan source, as interest rates can become overwhelming for your business.
Primary sources of business funds
When you are seeking for some business funding, there are mainly two types of financing you can explore.
Debt Financing. Generally referred to as business loans, this funding option is when you take out some borrowing and agree to pay it at the regular time frame, with fixed amount and agreed interest rate. With this type of funding, you have the responsibility to pay your loan whether your business venture succeeds or fails.Bank loans are typically associated with debt financing, although there are other business loans that can be acquired from private funding sources.
Equity financing. With this type of business funding, you are practically selling partial ownership of your company. Therefore, if your venture fails, investors will take most of the risk and may lose some money. However, if the business succeeds, investors get greater return compared to interest rates. Consequently, this type of fund source may be quite expensive for your business if it becomes successful. But because investors assume greater risk, you can benefit more from their involvement as they can offer business advice or connect you with other people to help your business grow.
Some alternatives sources of business funds
Merchant Cash Advance. In return for a share in the future business sales, cash advance providers usually offer businesses with a lump sum financing. Normally, merchant cash advance provider targets restaurants and retail service companies having strong credit card sales but do not qualify for other business loans because they do not have sufficient collateral.
Although cash advance companies often emphasized that cash advances are not loans, business owners must treat the advance just like a business loan and must fully understand the costs that come with it. The catch is that, merchant cash advance companies are not bound by laws or lender regulating agencies that set boundaries to interest rates.Cash advance providers directly collect a portion of the merchant credit card sales until the amount is fully recovered, usually in less than 12 months. Unlike business loans, merchant advances do not have a fixed amount or payment dates, so you can pay less during slower months.
Working Capital Loan. Small businesses often have difficulty managing their cash for their daily operations. With a business working capital loan, you can receive extra cash to use—whether you want to extend or amend your current job or you want to prop up your marketing and advertising or you just need some cash to satisfy your outstanding obligations or tax liabilities.
Compared to regular business loans, working capital loans do not require pledging of your personal assets. It also requires only simple paperwork and can be availed even by businesses with bad credit or low FICO scores.