Starting a business – what financing options do you have?

Written by Henry Young. Posted in Business Finances

Starting your own business is a massive achievement, but it only represents the beginning of a difficult process that not many entrepreneurs manage to complete. The sad reality is that hopes and dreams are not enough to succeed in the fierce and competitive corporate world. For this reason, most businesses do not even survive the first year on the market. Not even half continue to operate after five years and you can only sigh with relief after exceeding ten years of activity. Nevertheless, even before you can call yourself a conqueror, you have to create and ensure the foundation of your new business and we are talking about the financial base or financing. Exploring all the financing options available can be a daunting and time-consuming process. In order to avoid wasting valuable time and patience, you have to determine from the very beginning the amount of money your business needs and where you can find it. Moreover, you have to understand each type of finance so you know exactly what your business could benefit from.

Determine the amount of money your business needs

Your main goal when choosing a financing method is to meet short-term business needs and seize growth opportunities over time. In order to establish accurately how much money you need, you should use your business plan to project a budget. This means that you need to visualize or forecast future sales and expenses as well as your financial position every month. Do not forget to include capital costs when working with numbers and making the necessary calculations. These capital costs are one-time expenses that you have to bear for purchasing the land, the building and the equipment used in rendering services or producing goods. Moreover, always maintain a realistic perspective and consider the worst-case scenario. You may not enjoy the expected profits during the first months or even years or you may have to bear higher costs than anticipated. Apart from capital costs, you should also include operating costs in the equation. After all, running a business also means that you have to make regular payments for taxes, insurance, loan payments, membership fees and employee salaries, among others.

Self-financing represents the first method entrepreneurs choose

Fortunately, you benefit from numerous money sources, but the challenge is to assess the advantages and disadvantages of each one and get the most suitable financing for your business needs. Apparently, self-financing represents the most appealing option for entrepreneurs, probably because they benefit from various ways to use their own reserves.

Personal savings, for instance, do not involve interest expenses or dealing with creditors so you have the peace of mind that, in case of failure, nobody will come to you to claim money. However, some people already set aside personal savings for other projects or expenses, such as purchasing a new home or retirement. In you fall into the same category it means that you will not have the needed money just lying around waiting to finance your business. Home equity might be a solution, but it comes with great risks that not everyone is willing to take.

According to certain studies, many entrepreneurs or small business owners make use of credit cards with the goal to start or to ensure the rapid growth and success of their business. It represents a quick and easy method to cover expenses necessary for launching a business. If you resort to this solution, you should keep in mind that you will have to bear hefty interest rates if you miss the monthly payments. This type of financing could cause you serious problems because a huge debt might come knocking at your door and destroy your financial stability as well as the financial plans for your business.

Taking out a bank loan seems a good idea at the beginning, especially taking into account that it comes with lower interest rates in comparison to credit cards. Remember that you credit history is a decisive factor because most banks use it in order to decide if they should lend you the much-needed money or not. In addition, you have to secure the loan with collateral. If you do not have collateral or your credit score is low, the chances of receiving the loan decrease substantially.

If the bank loan is out of the question, you should think about cryptocurrency exchanges. It practically represents a digital marketplace where you can use traditional currencies to buy or sell crypto-coin. This method has enjoyed increased popularity in the last year and it functions almost exactly as a stock exchange so it is easily understandable. People from all over the world use it for business or personal purposes. If this self-financing method sounds appealing, do not hesitate to inquire more details and use it.

Family and friends could provide financial support

If you are not able to ensure the financial base of your business by your own, you should not hesitate to ask for help in other directions. We are talking about your friends and family. If they have the means or possibilities, they will definitely not refuse to contribute to the bloom of your business. However, you must think this situation through. Everyone knows that money have the power to separate blood relatives. You must decide if you want to interblend your personal relationships with your professional career and your business goals. You should take into consideration the fact that after accepting to provide you the needed financial help, the relative in question might make claims in the future if your business proves to be successful. Analyze the nature of your relationships with each member of the family and decide if this represents a viable solution.

Have you ever considered attracting an angel investor? This means that you are looking for a wealthy non-relative willing to invest in your start up business, but also need to give something in exchange, such as an equity stake. Generally, these people are very successful and have nothing to lose. They already invested in the industry and they are searching for opportunities. It represents a win-win situation for both parties.