How and where you finance your business operation can be the deciding factor between failure and success. Money from any source might sound like a good idea, but you really need to think twice before borrowing and spending money from just anyone.
In most scenarios it is advisable to pursue a few different sources of funding. Sometimes one funding arrangement can involve several sources at the same time. It might sound like a hassle, but getting the right source of capital for your business is essential.
Today’s entrepreneur has a myriad of different financing sources to tap into in order to raise capital. Here I have mentioned some of the best options available to every entrepreneur. Before we start, let me just make it clear that Venture Capital and personal savings have been omitted from my list.
Venture capitalists tend to hunt for firms with potential for sustained growth, so it is not a very likely source of capital for most entrepreneurs. And if you have not realised that financiers want to see some of your own resources invested in the business by now, you may already be in serious trouble.
Let’s start!
- Bootstrapping
Many of the biggest entrepreneurs have found a way to grow without soliciting external financing, as they don’t want such financiers to be in control of their destinies or obtain a significant (often disproportionate) proportion of their future earnings.
- HMRC
No, the HMRC does not loan money. What it does do is allow you to deduct expenses. If you are paying a lot in business tax, it would be worth considering if you want to spend your profits on growing your business or cutting down on your hefty tax bills.
- Friends and family members
If you are fortunate, family members and friends can turn out to be one of the most tolerant investors in the entire bunch. They don’t usually ask for your house or any other property as collateral. Also, they could be willing to sell back their stake in the business for a nominal fee.
- Vendors
Founder of Best Buy, Dick Schulze secured financing from some of the biggest electronic consumer firms, i.e. his suppliers. This is another way of ensuring that your financiers do not hold a significant slice of your income pie. However, you should avoid getting handcuffed to some of your most powerful suppliers in the process.
- Customers.
As long as the terms are not cumbersome, you could always seek advance payments from your customers. This will provide you with a cash influx, at a comparatively low cost without hampering the growth of your business. Advance payments also signify commitment from your customers towards your business.
Many of the biggest world beaters in business have sought funding from their customers. By employing this strategy, you can grow at a faster rate even with limited resources while at the same time remain outside the clutches of many investors.
- Economic development Organizations
Economic-development organizations might offer you financing at unbelievably low rates alongside a bank.
For example, let’s assume that you require £ 200,000 to develop a building property. A bank is offering you £150,000, at a variable rate of interest, now 3.25% on a first mortgage with an extra 200 basis points, rounding the total out to 5.25%. By approaching a development organisation situated locally, you could possibly secure a further £30,000 at a constant rate of interest, 4%. Additionally, you won’t be asked for warrants or equity shares to secure this type of finance.
Without this contribution, you would have to raise a further £50,000 in equity, which could turn out to be very expensive. If you don’t possess sufficient cash flow to cover the interest payments, you could seek extended terms from the development organisation. Some loans offered are interest only for the first two years, and it also possible to accrue the interest repayments for a specific time period.
You would be hard-pressed to find a development organisation that will fund your entire venture, but because of them you could acquire funding from private sources comparatively easily.
- Peer To Peer Lending
Alternative lending sources are continuing to grow in popularity online, especially in the UK, which has led to the emergence of many peer-to-peer finance providers. Think of this essentially as a social media version of lending where individuals can provide funding to other individuals looking to set up a business.
Alternative funding sources also offer a variety of useful products like cash flow finance, invoice finance, property finance, education finance etc. at comparatively lower interest rates than banks and with an easier approval process. As a small business owner, you could get creative with the funding options you seek once you understand all the options available to you.
- Bank loans
Banks provide any type of financing be it short/mid or long term financing. They also finance all types of asset needs including, real estate and working capital. These loans are provided on the assumption that you generate sufficient cash flow to cover the interest repayments and return the principal amount borrowed.
However, banks will always seek assurance on your ability to make repayments by asking for guarantees along with a secured interest on the assets you own.
How to negotiate closing costs. Unlike other sources of finance, banks offer greater flexibility. You always have the option of paying off your loan early, and thus can terminate your agreement with the bank sooner than was originally planned. Other financiers, particularly venture capitalists, may not be so acquiescent.
