If you have been running a business for quite a while now, you may have already been aware of the need for finance from outside sources. Banks, credit unions, individual and group investors – anyone who is attracted to your business plan may be ready to lend you money. This information discusses these sources in detail, but first let us look at why you need the money in the first place.
The Reason For Fund
Business expenses are not just limited to employee salary and inventory purchase. You will want to spend some money on advertisements before and during the operation of your enterprise. For retailers, apart from the beginning inventory, there is a need to constantly replace sold items. Then there are expenses related to having a certain amount of cash for transaction, cosmetic improvements to the brick and mortar store, utilities, equipment, fixtures, insurance payments, licenses, permits, fees for professional services, signs, remodeling, supplies, website creation and maintenance and many other unexpected circumstances.
Many new business owners plan for the first few months of their business operation, since most of the setup process takes place during this time period. However, it is important to think beyond this time and have sufficient amount of money in hand called working capital to pay for the rest of the year. If you are a business owner with no employees, this capital requirement is very small. Large firms need more money and resources hence are required to have a strong connection with a reliable fund source. A good rule of thumb is to have enough cash to cover all expenses for the first year. How much to spend on advertising, marketing and similar tasks depends on the competition and the type of the business you are running.
Finding The Fund
In order to figure where to find the fund for your business, you need to estimate how much money you need in the first place. Do you need all of the fund borrowed from a lender or only a portion of it? Don’t forget to include the interest payment you will be paying when estimating the overall number. Most lenders don’t let you borrow money for opening costs, and most of them don’t lend at all unless you have a proven track record that you are low risk client. To demonstrate the ability to repay, you will have to show your business plan or use tactics that are proven to be successful.
Personal savings is the best source of fund for your business if you are confident in what you are doing. But be careful when using your retirement savings as borrowing this fund before retirement may incur huge penalty and tax. So, unless you have a bad financial rapport, you probably should consider raising money elsewhere.
How about asking friends and family to pitch in? They can be the least expensive source of fund for your venture. Most of them will not charge an interest rate and you have the flexibility to obtain terms according to your needs. You can submit a business plan or convince them that your business is going to be profitable in the future. However, be aware that you may be asked to consider them as a partner of your business and not just as a friend or family member. This means sharing the ownership, pledging assets and other critical moves.
Partnership with an individual or another firm is one of the best ways to raise money. Here too, you will have to give up something in return to the lender’s generosity, either in the form of money, shares, stake or freedom to make decision. On the other hand, they may also bring in some kind of expertise and experience in the industry to the table.
The next source of fund is loan based on equity. If you own a home or any other building, it may be used as your biggest source of capital to run your operation. This will depend on the fair market value of your property and any outstanding balance that you have on the asset. When you are taking out a loan based on home equity, you are using the home as collateral so any unpaid bills to the lender will be paid off by selling the home. Similarly, any asset that your pledge as collateral will be taken away by the lender unless you pay all the bills on time.
Raising money with credit cards is what some business owners consider as a smart move. However, make this type of borrowing your last resort as credit card loans can be dangerous to your financial standing. If you find yourself in a position where you are unable to make monthly payment before the due date, the penalties and interest charges can be significantly high with most credit cards. On the other hand, if you really believe that this is doable, go for it. There is nothing to stop you as long as you know your situation. Remember that you are not the first person to use credit card loans to finance the business successfully.
In all of the cases above, as a business owner, you will have to convince the lenders that your enterprise will be successful in the short or long run. Additionally, you will have to provide objective evidence to prove this. This means explaining to them how you will use the cash, and how the money will be repaid along the way. Investors and lenders will also make subjective evaluations of your business. They will assess your financial statements and projections that may affect their decision to support you financially. Note that these lenders are also good listeners and assess based on your past performance and not on predictions and assumptions. Despite all these, if you are having difficulty making your case, you can always take time to build your credibility. This can be done by securing a small loan initially until your business can prove itself as a profitable one.