Raising finances for your business is an uphill task, whether it be to start a new business, to expand your existing one, or to get your business through some tough times. Why would a business have difficulties raising finances? Well, getting financing for your business may be difficult due to factors including poor credit score, lack of assets to pledge as collateral, and unreliable or unpredictable cash flows.
So, what are some of the ways you can finance your business wisely?
Seek funds from friends and family
Borrowing funds from friends and family is one of the most common ways to fund start-ups, mostly because you can obtain loans without having a business history. If you use this method, be sure to have a well prepared formal business plan, as this will show seriousness on your part. You should bear in mind that you are risking their financial future and important relationships. State clearly from the onset the nature of the finance—is it equity or debt? Give friends and relatives who fund you a clear financial projection and the expected payback time, so they see you are taking their money seriously. Also, point out that there is a risk of the business not succeeding, and thus losing their money in order to avoid any surprises. This method is based on trust and relations, has low acquisition costs, and can help to establish a small business.
Term loans are a common form of debt finance. They provide you with a lump sum of cash that you can use to meet your business needs, which you then repay monthly, bi-weekly, or in any other agreed upon manner. Short-term loans are a form of term loans that are meant to cater to emergencies, are repayable in 3 to 18 months, and have high-interest rates—starting around 14%.
Traditional term loans or medium term loans are the conventional loans that you are used to. They avail a large sum of money with a lower interest rate. The drawback of this loan is that it takes longer to process and requires both a good credit score and an operating business. Typically, term loans are offered by banks.
Due to the advantages of the traditional term loans, it would be in your best interest to build and maintain a good credit score so you can qualify for them. You may need to seek professional help from a reliable service provider to advise you and work with you on improving your score. A good score has tons of benefits in addition to getting a term loan.
If your business cannot secure a bank loan for whatever reason, a micro-loan is another option. Micro-loans are small business loans offered by institutions other than banks, called micro-lenders. The small loans may come in handy when there is a cash flow crunch. The lenders require fewer documentations than banks, do not require your credit history, and are less stringent. The downside is that they have slightly higher interest rates than bank loans. Micro-loans may work best for new businesses or entrepreneurs in ongoing businesses who need additional capital to acquire new equipment or to deliver an order.
You may finance your business in the above ways—borrowing from friends and relatives, term loans, or micro-loans—or opt for factoring, where you sell your invoices at a discount and get cash up front. The buyer also takes up the trouble of collecting the debt, thus saving you from collection costs.