At a particular stage in business, you will need some finance to boost the business activities or even expand your business so that it serves many clients. Additionally, many financial institutions can offer you the funds, but they have different terms. You need to carefully examine the terms before you opt for a particular source of finance and determine their implications for your business. Consider the benefits and the disadvantages of choosing a source of finance to establish its suitability for your business needs. Here are the key factors to consider when selecting a source of finance.
The risk involved – Many business owners tend to ignore this point, but it seems it is the most important consideration when choosing a source of finance. What is likely to happen if you fail to pay back the money in time? In case you are unable to pay the loan, you must be prepared for any consequences that might arise. For instance, if you acquired the money from close friends or family members, failure to pay back the money can spoil the relationship. Established financial institutions might liquidate the business asset to recover the loans.
Finance cost – What does it cost to obtain funding from a particular source of finance? All businesses aim at reducing their costs so that they can maximize the profits and this should be in your mind as you choose a source of finance. The least-cost source of finance will not be a huge burden to your business, and thus, you will pay it comfortably. It is vital that you find out all the costs related to getting finance from a source so that you do not struggle to pay hidden charges that were not present initially. You need ample time to repay the loan.
Amount of funding – How much money does your business require? The amount of borrowing will determine the source of finance that will fund it easily. Sources such as bank overdraft have limits, and thus, you cannot consider it for you’re a large sum of money. On the other hand, sources of finance are not also suitable for raising small amounts of money.
The purpose – Where do you intend to put this money? Do you want to cater for a miscellaneous business expense or you want to invest the money? For instance, capital expenditures are long-term and require long-term financing. If it is revenue expenditure, then you can get a short-term loan.
Deciding on the best source of finance can be complicated. You can hire a financial expert to help you make relevant decisions. Further, an attorney would help you to interpret various terms and conditions stipulated in the documents.