Your mother always warned, “Don’t put all your eggs in one basket,” those words of wisdom can be applied when financing a business. Several methods can aid buyers in funding a business. Buyers must recognize their available resources, such as the seller, lenders, and investors.
As children, we’re encouraged to “dream big” and told that nothing could stop us but ourselves. As entrepreneurial adults, this idea of dreaming big is often a part of your everyday routine. Still, it is inevitable that, at some point, you’ll come crashing down from those heights into reality. The realization that financing your particular endeavor can instantly dampen even the most passionate, enterprising individual can get you down. To put it bluntly, “Don’t let it.”
Having a reality check on the difficulty of securing financing for a business can be the first step towards making your dream an actuality. There are numerous types of financing available, some more unorthodox or obscure. If you take the time and effort to research all avenues for funding, you will be rewarded.
READ MORE :
- 3 Reasons Your Life Shouldn’t Revolve Around Money
- Equity Financing – 6 Key Strategies
- 3 Ways to Determine the Market Value of Your Commercial Property
- Inn Financing
- Merits and Demerits of Equity Finance
There are two main types of financing: debt financing and equity financing. It is important to you and your business’s success that you familiarize yourself with the types of funding to choose, seek, and, finally, obtain the right form for your needs.
Debt financing involves borrowing money that will be repaid over a certain allotted time with a set interest rate tacked on. The time of such funding can be short-term or long-term. In most cases, fundingshort-term funding would include repayment within one year, while long-term financing would entail compensation in a period that exceeds one year.
An advantage of this type of financing is that the lender will not gain your business ownership. You remain in control, and your only obligation to them is to make regular and timely payments. Small startups often need a personal guarantee to facilitate the financing deal’s closing.
Unlike debt financing, equity financing will involve giving the financing entity a share in the business. Some business owners dislike the idea of losing any amount of control. On a positive note, this type of financing does not incur debt. This freedom from debt can give a greater sense of security in starting a new business. Some entrepreneurs also find great value in their equity financing partners and see their presence as an asset.
The type of financing you choose is based largely on your business’s needs and the kind of collateral or available assets you offer. A substantial amount of debt financing can lead to poor credit and a shortage of funds in the future due to an inability to apply for more financing. A business that becomes overextended offers little collateral, and is steeped in debt is not an appealing option for many investors.
As previously mentioned, there are other more unorthodox methods of obtaining funds that can certainly benefit your business. Some options can be found in your circle of friends and family. One benefit of this type of financing is obtaining the money and a silent partner who will most likely not interfere with your business. It can also eliminate some of the red tape involved with more traditional forms of financing. This does not mean you can use a verbal agreement or “shake on it” to signify and bind the transaction. This is still a strategic business move, and you must treat it as such, which means proper documentation, clear terms, and mutual understanding of those terms.
Relationships can be ruined over inept efforts with this type of financing, so value your business and the other person by treating it with professionalism, attention to detail, and respect. Don’t become the black sheep at the next family reunion over misunderstandings or falling behind on payments.
Other options largely unknown to those who haven’t done research include unsecured loans and microloans. Resources like TheSnapLoan.com or Prosper.com offer loans based on cash flow, credit score, and debt-to-income ratio. Government grants are also a largely untapped resource available to entrepreneurs. Simply researching the website Grants.gov can be extremely helpful in your search for funds.
Venture capital is another route that many entrepreneurs look to due to the amount of funding that can be procured. A venture capitalist will likely offer larger sums of money that can greatly assist your business, but they will also gain a certain portion of control and ownership. However, this type of funding is usually scarce due to the assumption that many startups will inevitably fail. It would help if you found someone willing to take the risk and who sees potential in your vision.
This type of person could also be found in a more palatable option, the Angel investor. The Angel investor typically has a high net worth and, like the venture capitalist, must believe in the product and the person behind the product. Their loan often converts to stock, preferred stock, or convertible bonds.
An author and entrepreneur, Les Brown says, “Shoot for the moon, and if you miss, you will still be among the stars.” This is an extremely appropriate sentiment as it encourages you to dream big. Ultimately, those dreams, combined with perseverance and research, will take you closer to where you want to be.
