How To Choose The Right Source Of Finance
We all at one time or another in our lives find ourselves in need of loans or financial assistance. You can get loans or financial aid from family, friends, potential investors and banks. Choosing the right source of business finance is a difficult and very engaging activity. Before making a decision on who gets to finance your business, you should weigh the costs you stand to incur versus the benefits you stand to gain.This article seeks to enlighten us on things we should take into consideration before settling on a source for your business finance.
The first factor you should consider is the risk involved. We cannot all fully guarantee payment of loans on time.If we choose to borrow from family and friends, we should weigh the repercussions of not being able to pay the loan on time on our relationships. If you are a new business owner, it may be a bit difficult to acquire funding from banks.Funding a new business is considered risky and because of this, banks and other money lending institutions usually charge higher returns on their investment. You should take into account what borrowing from these financiers will do to your expected cash flow. You ought to ensure that your debts do not outweigh your equity or else your business will be in trouble.
You should also consider control of your business when choosing the right financing option. In most cases, banks and other money lending institutions cease to have control of your business once you are done repaying your loan. If you choose to finance your business by allowing people to buy some shares, you should know that these people will have a continuous right to be involved in your business until they are bought out. If you would like to continue being in absolute control of your business once you are done repaying your source of finance, it is better to acquire loans.
The cost of finance should also be considered. The aim of each and every business is to minimise costs incurred and maximize the business’ wealth. If you choose to finance your business through borrowing, costs you will incur include interest rates, broker’s fees and origination fees. Investors will require dividends for the shares they purchase. Go for a source of funding that costs less and brings in more.
We should also consider whether we require short term or long term funding when sourcing for finance. Long term loans are given for non-current assets and are repaid over long periods of time unlike short term loans that require payment in a matter of months. It is of very high importance that you choose a finance plan that works best for both you and your business.