If you are planning to start a new business, finance is probably going to be a significant issue. Whether you need to invest in machinery or borrow money, your financial advisor can help you through the process of creating your business plan and getting the funding you need. Most financial advisors will offer free consultations for new business owners to get their financing squared away.
If you are not interested in starting a new business or revamping an old one, your financial professional may have experience working with a business venture of a similar nature. He or she may be able to recommend business ideas or advise you on the types of projects to pursue, and the types of finance you need to obtain. For instance, he or she may be able to explain how a business can borrow the capital you need to expand your existing operation.
Another important point to keep in mind is that you don’t have to invest millions if you are in the starting stage as most of the successful entrepreneurs started with less investment and tend to grow with time. It’s all about raising finance and using it optimally. Let’s now move ahead and talk about the ways you can use to finance your business venture.
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Let’s be honest; the grass isn’t that green at the start. Financing your business in the starting stage can be a critical task, and banks might not lend you business loans due to the risk involved with startups. In that scenario, venture capital is the most viable source of finance. It is a type of financing that involves providing funds to startups that have the potential to grow in the long run. Funding a startup is a big risk as we can never predict what will happen. But the amount of possible returns somehow interests the investors to take the risk. Whether you will receive venture capital or not also depends upon the type of your business. If you are short of options, then nothing is better than raising venture capital. With further growth, you can switch to other options. One of the major tasks is to establish credibility in the market.
On some level, angel investors and venture capitalists are similar. One major difference is angel investors usually prefer investing in small business ventures, unlike venture capitalists. As we all know, the chances of failure in the case of small businesses are quite high. Due to this, angel investors are very cautious about investing money. It comes under the category of equity financing as the investor gets a share in the equity of the company.
They usually opt for businesses with a strong action plan and achievable goals. It might seem like a viable option, but it isn’t easy at all. Before making an investment, these investors consider various different aspects and take the decision accordingly. Some of the most successful startups went for this method of financing. Due to the risk involved, the rate of return expected by these investors is higher than the usual rates.
The next question is, where do you find angel investors? They come in many forms, and the most common is receiving investment from friends and family members. Next comes wealthy individuals who are willing to invest their money in sources capable of giving high returns. The major task is to convince them about the growth possibilities in order for them to invest.
In this method of financing, investors are willing to invest in your business but along with getting a percentage of business income or revenue. This simply means you need to pay the investor on a regular basis until the initial capital, along with the agreed amount, is paid. Entrepreneurs often prefer this method of finance over debt and financing. Let’s understand why.
As discussed above, the investor will receive a fair share of the amount the business earns. This removes the necessity of fixed payment (interest), as in the case of debt financing. Your outflow of cash will depend upon the performance of your business. Furthermore, the investor gets no rights in the decision-making; therefore, ownership is not at stake as well.
Using this method of financing, you will be safe from losing control along with regular interest payments irrespective of the performance of the business.
Debt And Equity Financing
The major task of any entrepreneur is to decide between these two sources of financing. Whether you go for debt or equity, it totally depends upon the purpose of raising finance. Fully depending on your business on debt financing is risky as there are chances of failure. You need to think it through and make a perfect combination of debt and equity.
If you are thinking about expanding your business, then raising equity capital is beneficial as the amount of interest would be high in this case. In this manner, a decision must be made according to the requirement and keeping the present interest rates in mind.
Bank loan falls under the most preferred sources of raising funds for business ventures. But if you are just starting off, it isn’t easy. In order to obtain a loan for your venture, a business plan is not the only necessity. You need to give security or collateral to the banks before you can raise funds. Raising debt is a risky option as there is no guarantee of your business’ success. But if you are short of options, then you can go for it. In most cases, people interested in purchasing existing businesses with good credibility in the market go for bank loans. Banks usually hesitate less in providing loans to existing businesses with credibility and goodwill in the market.
On the other hand, raising finance through equity financing is less risky but comes with giving up a share of ownership of the business. The equity shareholder gets the right in the decision making of the company. Now, the choice depends upon how much ownership you are willing to give up for raising funds for the business. Therefore, before making any decision, you need to consider all relevant aspects.
If you follow these tips and follow your financial professional, you should be able to get the help you need to complete the necessary steps to getting the right financing for your business. Going for the right sources is essential for the overall growth of the business. In order to make the right decision, keep all the relevant factors in your mind that could possibly affect your business. This decision is crucial for long term growth and development. Therefore, think it through and go for the right one.