finance your business

For starting any initiative, an important thing to consider is how you will finance your business. As an entrepreneur, you will definitely need money to invest in a new venture or expand your current operations to grow your business.

Raising venture capital for your business is a big challenge faced by many enthusiastic entrepreneurs. It often becomes a barrier to the commencement of your operations and commercialization of your product or service ideas.

While you source funds to finance your business, you first need to identify the amount you need, break it down to what you need it for, and then list down the possible sources you can approach.

In this post, we discuss the various paths you can adopt to source funds.

10 Ways to Finance a Business

Here are the ten most common ways to finance your business:

1. Personal Savings

The most preferred and of course reliable source of financing a business is using your own personal savings. If you are thinking of starting a business for some time, you would have kept some savings aside to invest in your initiative. These savings can also include any incoming cash you are earning from a part-time job that you plan to continue until your business picks up. It could be your spouse’s earnings or savings that you have not been using for paying the bills. Either way, everyone does keep some personal savings to invest in times like this. You have to compromise a little bit to take the risk of vesting your time and money in a completely new venture.

money saved in the form of coins

If you have any, the advantages of using your personal savings are that this source of funds would not constitute any liability on your company. It would also be, of course, interest-free.

2. Family and Friends

Do you have an extensive personal network? What about your professional network? Are you friends with your colleagues and other people you meet at your workplace? If yes, then you are in luck.

After you exhaust your personal savings, the next most common source to finance your business is asking for funds or borrowing money from your family members and friends. Everyone has some wealthy relatives who can easily invest and contribute in the financial for business. Some wealthy people even keep some money aside, primarily to finance a business when the opportunity comes along. Even if you feel like they won’t be willing to help and support you, there is nothing wrong with asking once and trying out your luck.

Suppose your family members and relatives are supportive of your venture. In that case, you won’t even feel the pressure to get quick returns so that you can return their money to them.

3. Bank Credit

After your own savings and those of your family and friends, you have no choice left but to approach a bank to help you finance your business. Banks are generally the primary source of financing a business. A term loan is the most common form of bank credit for both new and existing enterprises.

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The problem with using bank credit to finance your business is that the bank will ask you for collateral. Their interest rate will also be high. Despite that, every business owner approaches a bank to request a loan at some point in their life.

A good strategy is to utilize the amount you get through a bank loan in buying company assets instead of consuming it in the operational costs of your organization.

4. Partnership

This refers to changing the legal status of your business from a sole proprietorship to a partnership. This means two or more individuals will share the management of the company and will also share the profits, losses, debts, and liabilities of the business.

A partnership is done with the intention and purpose of expanding the sources available to finance a business. If you are short of cash to start your venture, you may decide to take this path and take on one or more partners to help you finance your business.

A partnership is governed by an agreement called the ‘Deed of Partnership’, which drafts out the rules for sharing each partner’s profits, losses, and responsibilities. The partnership can be general, whereby each individual is personally liable for running the enterprise. Or it can be limited, wherein the personal assets of the individuals are protected and cannot be used to pay the firm’s creditors.

Starting a partnership can give you access to a large amount of funds for financing a business.

5. Money Lenders

This is quite a risky source or means to finance your business. Still, nonetheless, we wanted to include it in our list because it is used by many individuals and enterprises. Moneylenders are groups of people who have access to large amounts of funds. They offer personal loans at high-interest rates, which you can use to finance a business.

If you use this means to get funds for your business, it is critical to carefully understand their terms and conditions. Moneylenders are often known to threaten and abuse those they lend money to if there are delays in paying the installments or other unforeseen circumstances. Sometimes, money lenders even draft out agreements that can lead you to lose your entire company and business if you fail to meet the terms and conditions of the contract.

6. Angel Investors

People who invest money to finance your business without making you sign a stringent agreement, and just in the hope of earning a return and making a profit over a long period, are like angels! They are also known as equity investors. These individuals have lots of money and are willing to provide the capital that you need to jump-start your business.

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They usually demand ownership and control over your company in return. The extent of ownership allocated to them depends on your terms and agreement with them and the amount they invest to finance your business.

Even though it is less risky to finance a business using funds from an investor than from a moneylender, it is not absolutely safe. You need to be careful not to get completely pushed aside once your company starts making money and generating revenue. This could happen if your angel has so much money that they invest enough to occupy all of your assets, leaving you out to dry.

Suppose you don’t have any personal savings to invest in your business at all. In that case, you may have to allow your angel investor to take a larger ownership share in your company. This is actually good for the rapid growth of your business in the short term. But be careful that you don’t lose control over your company in the long run.

7. Venture Capitalist

These are groups or small communities of wealthy individuals or government-associated entities with a pool of funds dedicated to investing in new business ventures. They only invest in businesses where they can foresee the potential of quick growth and large volumes of returns. They rarely invest in small and startup firms that can barely be measured or identified. Nevertheless, there is no harm in including them in your list of sources that can possibly finance your business.

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It is a good idea to source funds from venture capitalists because they might give you money that you don’t need to repay. If you get funds from a venture capitalist, they are taken as equity. This means that the next time you need more funds, it will be easier to get a bank loan approved or get credit extended as the bank will see that you already have a lot of equity in your company.

8. Customers

This one may surprise you. How can you finance your business through your customers? Well, this is only feasible if you have already established yourself as an expert in your field of business. Your customers can help you finance a business by paying for your products or services in advance. You can encourage them to do this by offering cash discounts to those who make payments earlier than the due date.

9. Trade Credit

Taking trade credit means negotiating with your suppliers that you will pay for the raw materials and goods supplied by them at a future date. This means you get the stock from your suppliers first and pay them later once you sell those goods and receive payments from your customers.

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Taking trade credit can be a suitable means to finance your business if you are confident about getting good customers in the beginning months of your operations. But usually, suppliers who offer trade credit charge relatively higher prices than those who only supply goods on cash payment.

10. Grants

The last on our list is grants. These are non-repayable funds given by the government or non-profit organizations to help you finance your business. But competition is usually hefty for getting grants. You can only get one if you are lucky enough to win the competition.

You need to bear in mind that the feasibility of the various sources and methods of how to finance a business, funds mentioned above vary over time. Making the best choice is often difficult, as you need to consider the specific needs of your business.

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