Whether you are thinking about starting a business or expanding a current business, you will have need of finance to get this done. Financing is especially applicable to a new business start up. There are multiple avenues to consider approaching in order to get startup funds for your new business. There are also various forms of financing that may be available to you. It is important, though, to choose the appropriate financing that will benefit the business more.
Money to Make Money
Some people say that it will take money to make more money. This may definitely be true for a new business startup. To be successful in business, it may take a large sum of money to get started. You will use these funds to purchase equipment, office supplies, pay for office space, and hire new staff and stock inventory. If you are in a service industry, it makes it easier since you will not carry inventory. You also will need money for your monthly utility bills, at least for the first few months.
Lack of Funding
One of the primary reasons why many new startups fail within a year is due to the lack of capital. Another reason is poor management skills. For that reason, raising capital is essential to a new startup in its early stages. Some people fund their startup using their own personal savings. However, not everyone has that amount of cash saved up.
That is why, outside financial help is necessary. You have more than one option, but you could start by asking family members or friends for a startup loan. However, in this case, you must be trustworthy, paying back the money in the time that you promised. You can also use your credit card to fund your business. Once your business starts making money, be sure to pay off your credit card debt right away to free up money on the card, in case you need it again at some junction of the business.
There are two primary ways to finance a business start up: accumulating debt on a credit card or requesting a loan. This is called debt financing. With debt finance, you are expected to pay back this money, if you got it from:
- A bank loan
- Bank overdraft
- Asset financing
- Credit card
You will be required to make monthly payments on these forms of debt financing. Bear in mind that interest will also be added. Most new business owners will start with the bank as their sole source of funding, regardless of the interest rate. However, you should consider other options. Yes, you want to develop a business relationship with your local bank, but you also want to make a profit. If you cannot maintain the monthly repayment, you will fall into a bad relationship with the bank. So be careful about making this choice. Consider the pros and cons and look at other options such as equity financing.
Equity financing is the other main method of financing, though often overlooked; it allows you to seek the financial assistance from venture capitalists. The money is invested back into the business and the angel investors or venture capitalists will take a share of the profit. You will need a solid business plan to go down this route. You also may have to consider giving up more of the business percentage in profits.
In the end, choose the finance option that will benefit your business in the long run. Seek the help of a financial professional, if you are unsure.