Businesses need funding for many reasons. Business finance can turn your idea on the whiteboard to an actual business, or in the case of an established business, it can help you take on new challenges, expand and grow. If you believe you have the right business idea, you may need to apply for finance to take your business to the next level.
Selecting the right financing model for your business can often mean the difference between its success and failure. It is an essential part of your business strategy and deserves to be given its fair share of thought.
Business Plan
Irrespective of who you approach for finance, whether it is somebody you know or a large financial organisation, you simply cannot proceed without a detailed business plan in place. It must cover the big picture things such as what product or service you are offering, how much money you intend to charge your clients or customers for it and how you intend to run the business profitably, but also the details of things such as where you’re going to find your customers, your marketing plan and how you will stand out from your competitors.
Consider Friends and Family
Asking your friends and family to invest in your venture may seem like a daunting thought at first. But seeking funding from family or friends can be a great solution if you’re lucky enough to know someone in a position to help. Capitalising your business this way has many benefits, such as more flexible repayments being possible and even the possibility of no interest charges being levied.
Selecting the Right Channel
The first step in deciding the right financing model is to make a choice between the traditional and alternative channels of funding. The channel through which you receive your funding will determine the repayment terms, the interest rates and also the risk that the debt carries.
The rise of the alternative finance industry points to the fact that at some point in the past, traditional sources of funding such as banks, failed to provide for the needs of entrepreneurs.
The crisis that has engulfed our economy in recent years has forced banks to develop a stringent procedure when it comes to financing businesses, which has seen many businesses miss out on capital for procedural reasons rather than because they represented too much of a risk. Businesses with potential have, for example, been turned down because investment for that particular industry has already reached its designated limit.
As a result, many small business owners over the years have been turned down by banks when they went knocking on their doors for finance. Despite having credibility and potential, small business owners found that they had nowhere to go.
This failure on the part of banks to fund the aspirations of small businesses resulted in the massive growth of the alternative finance industry, which as of today stands at a market value of £4.6 billion.
If you cannot wait to make your business thrive or have been turned down by banks on the wrong grounds, there are many forms of credit that you can still avail. If you are looking to fund your business idea, there are many financial products which have been designed to meet the specific requirements that you may have as a business owner, so don’t give up hope.
Selecting the Right Type of Finance
There are several options available when it comes to financing a business. It is possible to avail loans for very specific purposes such as buying or leasing equipment and office space. It is also possible to avail loans secured against assets or unsecured loans for providing a quick boost to the cash flow. A business owner must decide which type of financing suits their business model and priorities. The following are the four most popular financing options offered by investors:
Equity
Startups looking to fund their business with a lump sum of cash usually seek this type of finance. In this type of financing, investors make use of their own money to fund a business. By doing so, they share the risk that comes along with the fate of the venture but it can come at a huge cost to the business owner.
In return for their investment, equity providers seek partial ownership of the company thereby reducing the ownership rights of the founders. Since it involves giving up equity, startups should weigh their options carefully before going ahead with this particular financing model.
Venture Debt
Small businesses that are unlikely to have assets or a positive cash flow turn to this financing option. Investing in such small businesses involves a significant degree of risk and therefore lenders that provide this type of finance demand higher rates of interest.
With this type of funding, the lender is not subjected to the risk of a business failing. By availing this type of finance, the founder along with the business becomes responsible for the repayment of the loan.
Unlike Equity Funding, the lender in this case is not liable to receive any share of profit resulting from the growth of a company which it has financed.
Convertible Debt
This type of financing is similar to venture debt in terms of rates of interest and the fact that the business has to repay the full debt amount at the end of a specified term. However, if the business fails to repay the debt, it is converted to equity and the lender becomes a company shareholder.
Convertible Equity
Similar to Equity Funding, the lenders invest their personal wealth into the venture but without any immediate transfer of ownership. It does not grant the investor the right to control the company or share profits with the founder until a predetermined event takes place. It can include events such as mergers, acquisitions, or when a company becomes publicly traded.
The hardest part of launching a startup is to find funding. But it can also be the most rewarding part as it can boost your confidence in your business idea. Once you have a loan approved, saved enough money or found investors for your business, you can get back to doing the job that you love the most. In the world of business, the road to success may be a long one, but finding allies along the way can make the long road that little bit shorter.