It can be hard to find the right business finance when you need it. You might not know what the options are or where to begin.
Small businesses often turn to family and friends for loans, which can be risky and stressful. Bank loans are a common choice, but they can be difficult to get and come with high-interest rates.
Several different sources of finance are available, each with its benefits and drawbacks. Whatever your needs, there is sure to be a finance source that fits you perfectly.
In this article, we’ll outline the different ways to raise money and the factors that affect your choice. So whether you’re thinking about a short-term loan or long-term investment, you’ll know where to start.
What is Business Finance?
Business financing is the money a business uses to fund its activities and grow. Businesses need to raise funds for a variety of reasons. For example, they might need money to:
So what are the best sources to get more money into your business? Well, that depends on several factors, which we’ll discuss below. But first, let’s look at the various types of funds available.
Classification of Sources of Funds
There are three main categories of funds:
Based on Period
Based on Ownership
Based on Generation
Sources of Business Finance
Many different sources of finance are available, each with its advantages and disadvantages. The right choice for your business will depend on a variety of factors, including the size of your business, your financial needs, and business goals. Some of the most common sources include:
Family and Friends
One of the most common sources of borrowed funds is family and friends. Borrowing funds from family and friends can be a great option if you have a good relationship with them and are confident you will be able to repay the loan.
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Cons:
Bank Loans
Bank loans are another popular external source of funds.
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Government-backed Schemes and Grants
There are several government-backed schemes and grants available for small businesses. The reason why grants are so popular is that they don’t need to be repaid.
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Credit Unions
Credit unions are a good option for businesses that struggle to obtain sources of finance from traditional lenders.
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If your relationship with your local credit union is good, they might be willing to provide you with a business loan even if you don’t have perfect credit. So it’s always worth enquiring about their lending criteria.
Crowdfunding is a relatively new type of funding. It involves raising money from many people, typically through online crowdfunding platforms.
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Business Angels
Business Angels are wealthy individuals who invest money in businesses for a stake in the company. If you have a good business plan and can convince an angel to invest, this can be a great funding source.
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Asset Finance & Leasing
Asset finance and leasing can be a good option for small businesses that need to purchase expensive equipment or machinery.
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Business Overdrafts
Overdrafts can be a good option for businesses that need access to extra cash or working capital on a short-term basis.
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Business Credit Cards
Business credit cards are a type of short-term loan that can be useful for covering unexpected expenses or making purchases when you don’t have the cash available.
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Start-up Loans
Start-up loans are designed specifically for businesses in the early stages of development. They can be a great way to get the financing you need to get your company off the ground.
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Venture Capital
Venture capital is an investment that firms or individuals provide to businesses with high growth potential.
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So, venture funding is not suitable for every start-up. You will need to have a strong business plan and be able to demonstrate high growth potential before you can attract investors.
Business incubators are programs that support businesses in the early stages of development.
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So, business incubators can be a great option for businesses in the early stages of development. However, you must ensure that you meet the program’s requirements and are prepared to commit time to work on your business.
Factors Affecting the Choice of the Source of Funds
You will need to consider several factors when choosing the source of business finance. These include:
The amount of money you need to raise for your business
The amount you need will influence the funding source you choose. If you don’t need much, try using your money or taking out a personal loan. If you need a lot of capital, you may need to look at options such as venture capital or bank loans.
The stage of your business
The stage of your business will also affect your choice of funding. If you are starting out, then you may be able to use a start-up business loan. If your business is already established, then you may be able to use venture capital or an equity investment.
Your business model
Your business model will also affect your choice of funding. If you have high growth potential, then you may be able to attract venture capital investors. However, if your business is more stable, you may consider other options, such as bank loans or asset finance.
Your personal circumstances
Your circumstances will also play a role in your choice of funding. For example, if you are a homeowner, you may be able to use your home equity as collateral for a loan.
Before you choose a source of funding, it is important to consider all of the options available and make sure you are comfortable with the risks involved before you decide which one is best for your business. With the right financing in place, your business can thrive and grow.
This content was originally published here.
