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DIFFERENT WAYS TO FINANCE YOUR BUSINESS
DIFFERENT WAYS TO FINANCE YOUR BUSINESS

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Managing and running a business is not an easy task, and it has its own set of challenges. It is not as simple as it is taught in business schools. It requires contextualization with the industry, environment, economic conditions, especially in the times where change is the only constant, owners and managers of the businesses have to maneuver accordingly. Businessmen have to cope up with the external environment in terms of competition, product innovation, and consumer behavior. The external environment offers numerous threats to their businesses as well as opportunities from time to time to either test them or reward them for their persistence.

Similarly, a business has to do deal with a lot of internal matters. There are constants decisions to be taken for multiple domains like sales, administration, human resources, manufacturing, marketing, etc. And all of them are separate departments with their depth and breadth to cover and need to be managed accordingly.

However, there is one department which is above all in terms of its importance to management is, finance. Finance and its related management are crucial for businesses. No matter, in which industry you are working, its significance remains the same. Similarly, financial capital has its position in strategy and decision-making of the business. If a business doesn’t have enough capital, it can’t survive on its own and cannot make leaps to expand the business. Usually, businesses need financing when they plan to increase their business. They plan to invest in product development, research, and development, asset acquisition or market supply increase.

Businesses have a variety of financing options available these days as per their requirements and needs. They can opt for long term financing options like conventional bank loans, or short term financing like factoring arrangement with an Invoice Financing Company. Every option has its criteria, requirements, pros, and cons. Let’s explore some of them for our understanding.

  1. 1.       Conventional Bank Loans:

As discussed above, it is the most common form of financing businesses opt for. Banks are offering loan funding from the early times. Comparatively, these days it is quite slow and lethargic in its process and protocols. Banks need to ensure credit risk through processing your business information, credit rating, business standing, and plans. Typically, a bank asks to fill a “loan application form”, through which it verifies all the stated information.

Bank loan financing is less preferred by enterprises many a time because it is expensive in its interest rates along with attached loan covenants, which also makes life tough for a business. Also, banks are not comfortable in granting loans to small-medium size enterprises too.

  1. 2.       Factoring:

In simple terms, factoring is a mode of financing where a business sells its receivables on a discount to get upfront funds. It is a short term financing fix for companies struggling with poor credit ratings and facing working capital shortages. However, it’s an expensive source of financing which charges more than conventional bank loans. But in some industries, it is still in practice due to slow economic times and business turbulence.

  1. 3.       Friends and Family:

Asking friends and family to support your business is a viable option. People usually get such support in either the initial days of the businesses or in crisis times. Since you are risking money of your acquaintances, it is important to have a solid plan in place, before approaching them for help. Usually, when you involve your relatives’ money, you do not consider it at a seriousness level, which you would if you have opted for a bank loan.

Similarly, it is recommended to document every understanding and get it signed with both parties to avoid conflicts later on. Also, the return on financing needs to clarify that either you are offering equity or is it a debt financing for your business. Lastly, the key element to having a smooth financing relationship with friends and families is to keep everything in black and white and avoid any surprises, shock or vagueness for later part.

  1. 4.         Venture Capitalists:

Another source to finance your business is Venture Capitalists. They usually come on board with the demand for equity, and their expectations are different from normal lenders. They are interested in growing businesses exponentially; therefore, they only invest in businesses where they can foresee any synergies. Having Venture Capitalists has an additional benefit that they have the technical expertise of such turnarounds or growth.

But such collaboration comes with a cost of interference in your business activities which is not admired by some business owners. Therefore, one must need to say the pros and cons of such an arrangement.

CONCLUSION

Business financing is available to businesses as per their size, market, and plans. However, a business must weigh the options as per their convenience, alignment, and it must make financial sense to the bottom line of the business. Similarly, decisions must align with the main “Why” of acquisition of finance, otherwise getting an additional fund will become a hassle for the business.

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