It’s also pertinent to properly capitalize
your small business and to develop resources and methods to obtain further
capital. That is why I have decided to, thoroughly, explain this issue: 13 great
sources of capital to finance your business. This information is a section of
my best seller e-book and I have decided to share with you.
Why should you Finance your Business properly?
It’s very pertinent to properly finance your business. A
company without proper financing will have a tough time competing with
established competitors. Additionally, this will raise the risk of your
business eventually closing down or going bankrupt; neither of which you want.
What is Capital?
Capital is basically the money used to run your business. When you commence
your business, there are likelihoods that your first source of capital will
probably be your own wallet or your savings account.
You are the first and, maybe, the only person that will be interested
in the company you are setting up. Therefore, you must be prepared to put in
your own hard-earned savings to help your business through its first few
months.
The fear of losing your investment in the business should, naturally,
make you work harder to succeed. If it is a part-time business, you may use
income from your regular job to finance it. Many other sources of start-up capital exist. These, I will list
and explain 13 of them below.
1. Bank Loans:
Getting loans from the bank is number one source of capital to finance
your business. There are two categories of bank loans: (a) business loans and
(b) personal loans. Ok, let me explain.
(a) Business Loans:
The bank is often the first place small business starters think of
when it comes to financing. While some banks offer loans to small business,
some do not. It depends on the policy of the bank and the criteria they have
established to loan money.
Typically, a bank will loan money to a client if the client has collateral
or has impeccable personal credit qualification or can repay the loan with any
on-going income other than from the start-up business.
The criteria banks use to lend money are the amount and purpose for
which the loan is to be used, the primary and secondary sources of repaying the
loan, the company data, such as management and operations, the financial data,
which includes balance sheets and cash-flow statements, your personal credit
history, and the viability of the company.
Most loans are usually secured by the equipment, personal or company
assets, or the land that has been purchased. However, some banks may ask for
full collateral.
The reality about getting a bank
loan for your business
Getting a loan from a bank is difficult; you should know this
up-front. Most starters will not get it. However, if you can grow your business
steadily over a period of time, banks will be more inclined to lend you money
because you have proven you can operate your business. Many small business
starters will simply have to grow first before approaching a bank.
However, you may still get a
loan. Some ways of enhancing your odds are to appear well-dressed, calm, and
answer questions honestly and directly, and to have a killer business plan.
Remember that honesty is the best policy. If the bank turns you down, you can
try other banks. Some first-time business start-ups have gone to several, if not dozens of banks, before getting a
loan. Be patient and persevere.
b. Personal Loans:
Another option is to get a loan in your name, as opposed to the
business name, or a personal loan. The most popular types of personal loans
today are home equity lines of credit, both of which are based on the value of
the equity you have in your home.
2. Friends and Families
Often, a small business can raise capital through friends and
families, especially a start-up. Again, you should treat these people with
professionalism and honesty by explaining the potential risk and returns
Another type of this source of financing is your business colleagues
or other business people you may know, have worked with, or have networked with
in the past.
3. Sell some of Your Assets
Some people sell homes, cars, furniture, land, or other possessions to
start their business. This sounds absurd! But is a good source of business
finance if you can predict the profitability of the business. You will have to
be careful here because you wouldn’t want to sell something you will want or
need later on.
4. Partners
Taking on additional business partner, either in the form of fellow
incorporators or limited partners, is another method of raising capital. Often,
an investor will agree to become a limited partner on the strength of your plan
and your personality. In this situation, your
partner is strictly a financial backer. He or she will want to see a return
on investment but will not want to participate in any other work of the
company.
5. Government Agencies
The federal and state government have a variety of departments and programmes to aid small businesses. Information
on these can be sources from your state, chambers of commerce and industry etc.
6. Grants / Incentives
Sometimes foundations and non-governmental organisations offer grants
and incentives to small business. Before they finance your business, you will
have to proof to them that your intended business suits their objectives. For
instance, UNDP can finance the production of locally made mosquito nets which
is in line with their objective of preventing malaria.
7. Venture Capitalists
A venture capitalist is an
individual or organisation that invests in companies with potentials for growth
and profitability.
Venture capitalists are professionals that are not easily won over. In
order to attract one and to sell your company’s prospects, you have to be a
professional yourself. Asides from meeting you, venture capitalist will want to
see your plan and financial (balance sheets and cash flow) statement.
The capitalist will determine whether your company has a past record
of success that will bring about a future record of growth. If your company
fits this profile, you might interest a venture capitalist.
Those going into business for the first time may not be financed this
way, so the best way is to start your business, grow, and then prepare a
proposal with an appropriate firm.
8. Part-time / Seasonal Job
A part-time job before, during, or after your start-up can provide
capital and will be proof to potential investors and lenders that you are
serious about financing your business.
9. Business Networking / Brand Name Sharing
This is where one or more businesses combine to share a brand name,
although each produces different goods.
For example, let’s say a group of automotive suppliers cannot get their
products on shelves. They can sign an agreement, put the common brand and logo
on all products, and use a combined marketing and distribution system to sell
the goods.
This really works and can increase each participant company’s market
share dramatically. Although this is not capital per se, it’s a way of helping you sustain your business at start-up.
It is also a way of increasing cash flow and revenue
10. Use another Business’ Assets
Maybe you have one part-time business with cash flow but limited
growth opportunities. This business could provide eventual start-up capital for
a future business with greater growth potential.
11. Business by Barter
Although the terminology “trade
by barter” is not getting any younger, business by barter is relatively fresh
and budding. Here, participating companies exchange good and services to ensure
mutual progress.
For instance, if you are unable to raise any capital by yourself, you
might have to raise a business plan for presentation to a financier or put your
venture on hold.
Again, the best way of getting money is to first raise some personal
money. That is why most businesses must start small. Don’t give up, though some
companies have started small and grown big while some started big and failed.
In essence, capital is very important, but must be used properly in conjunction
with your plan and your goals.
12. Equipment Leasing
This is basically a loan in which the lender buys and owns the
equipment and then “rents” it to a business owner at a monthly rate for
specific number of months. At the end of the lease, the business owner may
purchase the equipment for a current market value, or continue with the lease.
13. Hire Purchase
Hire purchase is an agreement whereby the buyer asks a finance company
to buy a piece of equipment or machinery, hires it for a specified period of
time and then exercise the option of buying it for a nominal sum while all hire charges and instalments are being paid. As
long as the instalments are being paid, the hirer has the right to use the
equipment.
If you, therefore, have need for certain equipment and toy do not have
the money to buy it outright, you can explore the possibility of obtaining it
under hire purchase terms.
Conclusion
So far so good, we have dissected the crack on 13 great sources of
capital to finance your business. These are proven sources for business
financing and I hope you’ve learnt something. You can do more research on some or all of the
option explained above. Thank you for reading.
Your thoughts!
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