How To Choose The Right Source Of Finance
We have all required financial assistance at one point in our lives.You may get this assistance from family, friends, potential investors and banks. Choosing the right source of business finance is a difficult and very engaging activity. It is important to weigh the costs and benefits before settling on any institution to offer you funding. Discussed below are factors we ought to consider when financing our business.
The first factor you should consider is the risk involved. Unforeseen occurrences may affect our ability to pay our debts. We should consider the risks we put on our relationships with family and friends if we are unable to pay a loan they offer.If you are a new business owner, it may be a bit difficult to acquire funding from banks.If your business is just starting or has had credit difficulties before, financiers will often charge high returns on the investment they make.You should take into account what borrowing from these financiers will do to your expected cash flow. You ought to ensure that your debts do not outweigh your equity or else your business will be in trouble.
Consider the control you want to maintain on your business before choosing a source of finance.In most cases, banks and other money lending institutions cease to have control of your business once you are done repaying your loan. Investors on the other hand will continue having some control over your business until they are bought out. If you would like to have full control of your business, banks are probably the best option.
The cost of finance should also be considered. Every business’ goal is to minimise the cost of finance and maximize returns acquired. Interest rates, broker’s fees and origination fees are costs you stand to incur when borrowing from banks and other money lending institutions. If you decide to sell some of your shares, you should also consider payment of dividends to your investors.It is important that you weigh the costs and benefits of all sources of finance and choose one that costs you less.
We should also consider whether we require short term or long term funding when sourcing for finance. Long term loans are given for non-current assets and are repaid over long periods of time unlike short term loans that require payment in a matter of months. Choose the source of finance that brings in more benefits than costs.