After deciding what kind of business to start, what comes next is how to finance it because there will always be some cost involved when starting a new business. The amount differs on the exact nature of the business. Sometimes, lack of funds could deter startups, and force them to change their mind. The reality, however, is for those who can come with a workable business idea, there are sources that are willing to accommodate the required financial need.
Most experts agree that the first place to look at for a startup fund is one’s own savings. The reason for that is it is the safest source that does not require paying back or incurring debt that could end up upsetting one’s budget. That kind of money is expendable and there is no cost attached to it such as paying interest. It might generate interest depending wherever it is kept, but it will not cause any financial upset if it cannot be replaced.
The second safe source is approaching families and friends who, for the most part, might not attach any kind of hook or obligation to the money they might be willing to give out if they agree to do so. Yet, it is possible to do all kind of arrangements with these kinds of sources depending on what they want, and on how much leeway the entrepreneur is willing to allow, such as give them some equity ownership or a share from the future profit made, or even allow an active or dormant partnership role.
There is an arrangement where the entrepreneur can own 51% of the business and allow the rest for whoever is interested to have equity. The advantage here is the entrepreneur will have the say if there happens to be a disagreement about the course the business should take in the future.
The other good source is equity, where for example, it is possible to use the equity in a home or a life insurance to obtain a loan and that loan has to be paid back with interest most of the time, on the agreed upon time. Any failure to repay back could mean losing that equity showing that there is risk in this kind of obtaining financing.
It is also possible to use credit cards although that kind of loan could be expensive because of the high interest rate credit card companies are charging. Nonetheless, credit cards are good to pay for recurring expenses in a business environment, where it is possible to generate revenue that can offset the amount used. Otherwise, credit cards could be costly, and the interest could also be a compound interest.
Depending on what kind of business the entrepreneur is starting if there are suppliers and buyers, they can also become a source of fund simply because buyers can pay in advance for the goods they are planning to buy, while suppliers can also agree to allow credit with no cost attached to it, as long, as the money is repaid on the agreed upon time.
Again depending on the kind of business, there is a process called factoring which is, a given business might have to wait 30 to 60 days to get paid after the delivery of the goods. In a situation like this, it is possible to use factoring.
How factoring works is there are sources that are willing to lend money based on the invoice if they believe the creditors have a good reputation and credit rating to honor their invoice. These sources can lend up to 90% of the invoice and could charge around 2% to 3% of the invoice as interest. They will agree to wait until the invoices are paid. This process relies heavily on the reputation of the borrowing business and the invoice provider, where any failure to honor the obligation would mean no more future business.
If equipment is needed such as a vehicle, for example, there are companies that can lease the vehicle on behalf of the new company by allowing it to pay a certain amount monthly. After a certain time, they can sell it to the business at a discounted price. If what is needed is a vehicle, most car dealerships can have a similar or better leasing arrangement. However, if what is needed a different kind of equipment using equipment leasing companies is possible. The outcome is it is possible to avoid procrastinating the starting of the business simply because vital equipment becomes very expensive to buy.
Among the contemporary ways of funding a startup business is getting financing from Peer-to-Peer (P2P) lenders, where individuals can participate in a P2P platform and post what their project is. The outcome is they can find peer financiers who can lend them money directly or invest in the venture. The lenders expect the money to be paid back showing that it could be a loan, while the investors or lenders might also want equity or participation in the running of the business.
Crowdfunding is one of the newest forms to obtain funds. Individuals can post their need on a crowdfunding website, where there could also be sources who have the money that they want to invest in any promising venture. If these two groups arrive at an agreement, the entrepreneur will end up finding the required fund. For the most part, this kind of fund can be an investment or it could be a group of people donating a contribution to help any given cause, where there is no need to pay back.
The source of financing does not stop there, where what is really important is the coming up of a viable business plan. There are also those known as Angel investors who could be individuals who could have the means or they could be established businesses. These sources want to invest their money in a viable venture and for the most part, they do not want to be involved in the day-to-day running of the business, but they require a transparent arrangement and they also might require some kind of leverage to monitor how their fund they loaned out is doing. The agreement could vary, but Angel investors are favorite sources of funds.
Another group that is a bit dreaded is venture capitalists that are not easy to attract in the first place. Once they show interest in a given venture, it is possible that they could be a source of a substantial amount of investment. The only problem with them is once they liked what the venture is trying to accomplish, they want to get involved in every aspect of the business showing that they can become major decision-makers, as long as their money is in use by the new venture.
The last source that requires a collateral or personal guarantee for the most part are banks that also have an overdraft account for their long-term customers with good standing. Any new entrepreneur who can meet such requirements, which is in fact similar to using the equity in a home can obtain financing with a better interest rate than similar sources. They facilitate loans using equity, not only in homes, but it could be anything that has money value such as land and even life insurance equity.
One more source that is not easy but that is there is a government grant. The good thing about grants is once the granting government agency approves the grant, there is no money to pay back, but meeting the stringent requirements could take time and could even be discouraging, but it is out there as a lucrative source for those who meet all the due diligence.