Whether an entrepreneur is looking to start a new business or grow the old one, there’s a need to obtain some form of funding to initiate an action. However, analyzing what sources of funding are beneficial or available as a business owner is trickier than thinking about other things.
Despite all the differences among various industries in the world across, the following is a list of sources of funds available to all firms. Moreover, this guide will help entrepreneurs to navigate the advantages and disadvantages of all options available to them.
1. Retained Earnings
It is known as the accumulated net income of the company that a company retains at the end of the reporting period. Retained earnings are the most essential source of funds for corporations. The company uses this amount to reward shareholders in the form of dividends, besides investing in the growth of businesses.
2. Debt Capital
Like individuals, corporations can also borrow money through bank loans or through a debt issue––are known as corporate bonds. This debt capital allows investors to become lenders to the company, also known as or creditors.
The drawback of the debt capital option is the hefty interest amount that the company owes to the lender. Likewise, a failure to pay interest or principal amount can result in bankruptcy.
3. Equity Capital
An enterprise can generate money by selling shares to investors, called equity funding. This option is beneficial because investors do not require interest payments. Whereas, the drawback is that profits gets shared among all shareholders. Moreover, these shareholders also get voting rights in the company, which means that a corporation forfeits a part of its ownership control as they sell off more shares.
4. Business overdrafts
Business or bank overdrafts are a super-fast and effective way to set up a loan. This option becomes available when the company’s balance hits zero, and still, an entrepreneur can carry on making payments, known as the bank overdraft facility. However, the amount can spend up to the limit set with the bank.
Having a bank o/d facility is a beneficial option if business operations include seasonal activities, usually during which a company might face short-term cash flow shortages.
Be aware of bank o/d facility as it usually comes with higher interest rates as compared to conventional loans. Moreover, many banks charge an overdraft fee in addition to charging interest–––meaning this source of funds for business financing carries significant risk to the business owner.
Crowdfunding allows business owners to raise small funds from a large number of investors, typically via the Internet. An entrepreneur has two options to use this platform, either run an equity-based campaign, or a reward-based crowdfunding campaign. In the first option, the owner exchanges equity for investment, whereas, in the second option, the investors receive perks in exchange for their capital.
Kickstarter, IndieGoGo, Seedrs, and Crowdcube are some of the best platforms for crowdfunding a project. Remember, it usually takes a considerable amount of time for both the preparation and marketing of a successful crowdfunding campaign. No doubt, it is an excellent form of financing for small business owners.
6. Finance Lease
It is a favorable option for small business owners who don’t have the required capital to purchase an asset. Here companies only have the right to use an asset for a limited period. Whereas, in a hire purchase agreement, a finance provider can also purchase an asset.
The main difference between the two options is that with hire purchase, the company will never own the asset. On contrast, in a finance lease, the finance provider can also sell the asset at the end of the lease term. Or they may offer the business a part of the sale value of that asset.
Which option is better?
A lease option is more suitable if your company needs an asset for a limited period. Also, there is no need to list it on the balance sheet. Simply offset the rental costs for the property against the company profit––it can be a significant tax benefit.
A small business owner can fund their business themselves. Because they are not operating on a large scale, they can use savings or personal debt like credit cards or mortgage. Alternatively, a business owner can also sell assets (boat, vehicle, or a second home) to generate cash for the business.
8. Friends and family
No doubt, friends and family are the biggest support. They can provide either debt or equity funding. At first, this may initially seem a great source to find a project, but one needs to be very careful about this group. Unfortunately, when businesses fail, the relationships also come to an end. After all, the loss of capital can hurt feelings or even ruin friendships. Be sure that those who are interested in investing know the true risks.
A partnership can be a great source of funding for businesses. There will be a need to consider how much total amount each partner will contribute to the business. Like with friends and family, business partnerships can raise conflicts to succeed. In this case, each partner has a definite roll (all documented) to play, each using their capital and own strengths and weaknesses. All terms and conditions are present in a partnership agreement to avoid any confusion. Then the partnership business might get success.
10. Angel investors
Angel investor is someone who often has a business or finance background and is interested in investing funds in businesses. They get a share in return for their investment. Typically, they make less investment, and if the company needs a billion-pound investment, obviously, business angels are not the way to go.
We hope this guide will help you in finding the best sources of funds for your business in the future. However, it is a bit time-consuming process. If you’ve any questions related to funding, please ask us in the comments section below.
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