Are in need of business funding, and you do not know the most appropriate source of fund for your business? This is usually a challenging decision for most business proprietors, and it calls for a well-thought approach. You must note that each source of finance has different requirements and they have different impacts on the business in the long term. In making your decision, you should not only look at the advantages of the source of finance but also the disadvantages that might accrue. Here are the key factors to consider when selecting a source of finance.
The risk involved – Many business owners tend to ignore this point, but it seems it is the most important consideration when choosing a source of finance. It is prudent to think about the possibilities if you do not pay the money. What are the available courses of action that the lending institution can take if you default to pay the loan? Maybe it is not a lending institution, but a friend and that would threaten the existence of your friendship. Established financial institutions might liquidate the business asset to recover the loans.
Finance cost – What does it cost to obtain funding from a particular source of finance? Lending institutions have different lending rates, and thus, you have to choose the most favorable one. It is desirable to find the least cost source of finance for your business. Some sources of funding have hidden costs which you only realize after acquiring the loan and therefore, you need to examine the conditions of the finance to ensure such costs do not exist. You need ample time to repay the loan.
Amount of funding – How much money does your business require? Suppose you want to carry a capital investment that is capital intensive, you will get the money from a long-term source of finance. Sources such as bank overdraft have limits, and thus, you cannot consider it for you’re a large sum of money. For example, you cannot get a long-term loan from a bank overdraft.
Use of the finance – How do plan to use the money? There are different types of expenditures in a business and they can influence the source of finance that you choose. The purpose of the finance plays a significant role in selecting the source where you will get it. If it is revenue expenditure, then you can get a short-term loan.
Deciding on the best source of finance can be complicated. You can hire a financial expert to help you make relevant decisions. You will also need the service of an attorney who understands such matters to help you.