Money is the lifeline of a business. Your business would accomplish new goals and attain new heights when sufficiently fueled by funds. If you are a business owner, you would realize that your business would be requiring some additional capital.
Any business would be requiring funding for various reasons like getting through a rough patch, for engaging in speedy growth, and other such circumstances.
The two most popular choices you would get for raising the required cash are debt or equity financing. In equity financing, you are required to forego a specific percentage of the company’s ownership.
These could be very useful options available to you at different stages of your business development. It could be pretty challenging to identify the right option at the right time. Here we would be exploring some of the benefits of business funding and also, some of its drawbacks.
A business would be perpetually struggling because of the staggering business debts if it does not have the support of a funding source. Funding is the life-saving fuel that helps the business to run smoothly without any sort of hiccups. Several avenues are open to a business for attaining funding.
The funding option that is chosen depends on how solvent an owner of a business is while establishing the business, the extent to which the business chooses to be in debt, and the amount of money required by a business during its launch and for maintaining itself during the different stages of its development.
Seed Money
Equipment, office supplies, materials, business cards, and a website, all these would be costing huge money and it requires coming from a source.
Seed money could come from any investor, or the savings account of the business owner or any small business loan. Seed money must be raised for getting the business started.
Cash Flow
A business owner would be requiring an income for survival. If employees are involved, they need to be paid their salaries. Several utility bills need to be paid. There are insurance and other expenses for sustenance and survival.
During the initial stages of a business, profits are bound to be low; hence, business funding is a must to get the cash for meeting various expenses until there is a boost in profits.
Expansion
When a business has outgrown its present location, or if there is an increasing demand for new products and services, it becomes mandatory to expand your business. A brand new location, additional staff, new products & services, and marketing research, all these could be financed promptly with effective business funding.
Repairs
Accidents occur, fires, natural calamities such as tornadoes, floods, and hurricanes could cause serious damages to a business and may adversely affect its bottom line.
Even though insurance would be covering most calamities, deductibles, and premiums require being paid and you must have enough funds to pay the salaries of your staff while the business is being repaired.
Some less devastating events could also trigger the need for a large cash outlay. For instance, if your factory equipment needs to be replaced as they have become outdated. Often you need to invest in new computers or get the old computer upgraded.
The Benefits of Private Funding
Boost in Funding
Funding amounts are bound to vary. However, you would be receiving additional funding from any reliable private lender as opposed to the conventional channels.
That is simply because the private lenders may buy your company’s stock for much more than its present trading value. For instance, if a company’s stock is currently trading at $10 for every share, a private lender could be giving you $15 for every share.
Equity Capital
Conventional funding techniques are placed under the debt capital category, implying that the borrower would be taking the debt, including the interest automatically in exchange for the borrowed capital from the lender.
As opposed to this, a private funding could be sought for obtaining equity capital with a difference. You require forfeiting your company’s partial ownership basically in exchange for the help with capital.
Faster Approval
This reason is good enough to seek funding from a private lender as compared to conventional means. You generally get loan approval from a private lender in much less time.
Private lenders could take decisions fast as there is less number of tiers via which the entire approval process is supposed to go.
Once you are able to obtain the funding fast, you could consider focusing your attention solely on what really matters most- starting and successfully growing your business.
Easier Loan Approval
Loan approval is quicker and even easier with private funding. Conventional lenders would be meticulously scrutinizing your credit history.
Not that the private lenders do not take a look at your credit history, but they are more interested in your business and its projected or current revenue.
If you are having a robust business idea, there should be no issues in getting a fast and easy loan approval from a private lender.
Investor Involvement
To an extent, investors can also be involved in private funding. Banks are usually unlikely to offer any assistance beyond the financing process to their borrowers, but private investors tend to be more interested in the entire process since they want your business to succeed too.
If your loan is approved by a private investor, he would be providing proper guidance and some additional support and assistance to make sure that your business succeeds.
Disadvantages of Taking on Debt
Debt financing is a good way to get access to capital, but it is not without its faults. The most obvious issue is the repayment.
Equity finance is a comprehensive solution where you can focus on running your business and pay the stakeholders in stock or otherwise when you are successful, which allows positive cash flow and superb flexibility.
Debt weakens the financial position of the company, and you might run into hard times and find it difficult to repay your dues. Since a portion of your capital is also tied up in repayment, your scope for growth is also limited until you are debt-free.
Conclusion
Like any other business-critical decision, the choice of applying for debt financing is a serious and subjective one that needs to be weighed out while keeping the circumstances of your company in mind.
Not only do you need to understand the pros and cons, you also need to realize that financial scenarios change and your decision shouldn’t come back to haunt you in the future. Always consider the best possible option and go for it. Find reliable people to run the financial aspects of your business, or outsource the same to the third party experts.
