Entrepreneurs are made. The foundation of a successful business lies in the type of finances that the business chooses. Small businesses face a lot of challenges from the capital to business plans to commitment towards finding affordable sources of capital. Understanding the various financing options gives one business an edge over another. The difference between those who succeed in business and the models that have failed is the financial step they take
The following are some of the sources of finance:
They have been in this lending field for a long time. Banks provide all sorts of loans depending on your guarantors, your credit history, the number of transactions you have made with the bank and the current bank statement figures. The bank gives the principal together with a designated interest amount.
Bank loans are held against assets commonly referred to as collaterals. If you fail to pay, then the banks can recover their money through sale or repossessing the collateral asset. Bank loans are suitable for businesses which have an excellent credit record.
- Bank loans can be trusted
- They can loan high amounts as long as you prove you can pay back with the interest within the time
- They charge high rates of interest
- They are based on conservative rates which hike overtime
- They may take a long period of time to process the loan
- The application procedure is tedious and time-consuming.
- Those who guarantee to the unpaid loan may suffer the consequences of loan default by the loaned.
- Cash advances
Merchant cash capital is one cash flow option. The amount is usually given in huge sums then pre-paid in installments. The merchant commences their debt collection as soon as the funds are credited in the business account.
This means an advance charge is made against your business’s future receipts and income from credit card sales or remittance of daily payments.
In the case of credit card sales, the repayments rates fluctuate with the sales while the daily remittances are fixed. The merchant will recover his cash wither you make sales or not.
The amount of merchant cash capital that an entity qualifies for depends on their repayment muscle. The merchant cash capital provider conducts a comprehensive risk assessment before coming up with his favorable rate.
- The application process is simple and fast. All applications are done online. The required documents are business, tax certificates, bank statements to business identification certificates, driving licenses ort blank checks. Most approvals are done on the same day.
- The faster merchant cash approvals enable the entrepreneur to access quick cash. It can, therefore, be used to fund non-budgeted business expenses
- The amount that you can access is in depended on your credit scores. It solely depends on the credit card sales.
- Given that the merchant cash capital is unsecured, you do not have to commit any collateral in order to access the capital.
- You are free to choose your repayment mode.
- Downsides in sales may mean that you repay the loan remaining with nothing to plow back
- They do not increase the creditworthiness of the business since they do not provide credit ratings.
- High factoring rates mean that they are one of the most expensive borrowing methods
- Businesses with a limited number of transactions might be suffocated by the merchant cash capital repayments.
- It may not be easy to change from one merchant cash capital provider to another.
This type of financing is based on discounting invoices to a factoring company. As long as you issue an invoice, you can get receive a reduced payment for it.
Businesses with good records who have issued a number of invoices
- The invoice acts as collateral
- The credit limit of the business increases with the number of invoices issued
- The factoring company acts as an agent for the company in collecting debts
- It risks the trust between the customers and the business
- It may not be suitable where bad debts are involved
- Startup companies may not benefit from this financing model
It’s raising money through campaigns
It’s suited for those entrepreneurs who have outstanding business plans
- Reputable companies can benefit from this model
- It does not require information on previous credits
- It’s a marketing tool
- It needs expensive online marketing investments
- People may not believe in your idea
- Equity financing: This means that you can get personal money or savings and pump into the business.
- Patient Financing
This is money that you can get from family and relatives and friend. It’s repaid when the business makes a robust profit.
This type of financing has no interest rates
Conniving kinsmen may want a share of the business equity
It may lead to fights between close people.
- The angels
These are prominent business people who look out to support businesses in exchange for a stake. They are commonly referred to as Lions.
They will provide guidance inform of management to the company
They cannot be used as a source of emergency funds
They are not easily available
- Bank Overdrafts financing:
this is where you withdraw more cash from your bank account in excess of your current bank balance. This is a short-term source of finance.
This is where the business operates on prepayments. It is a safe and reliable means of funding. It’s best where the business is sure of continuous operation.
- Government grants
You can also get help from the government. Although it may take time to access the finance, the interest rates are always very low.