Are you thinking of leaving the rat race and starting your own business? After all, running your own business can offer a number of advantages – higher income potential, no nasty bosses to deal with, working in your own time and even the likelihood that you can work while travelling.
That said, starting out on your own is obviously not easy; this is one reason why so many people would rather be an employee than an employer. Out of the many obstacles, coming up with the capital to finance the business is a huge one. Other than just the capital, businesses may also meet with financing needs throughout the lifespan of the business.
Whether you opt for a bank loan, crowdfunding or using invoice financing, each of these sources of financing has its own advantages and disadvantages as well as criteria they will use to evaluate your business.
Here’s an overview of 7 common sources of financing for new businesses:
1. Personal savings
Most business-owners start out using their own savings. While this entirely makes sense, it may not be the wisest thing to do. However, this can be risky since you stand to lose all of your money. It may also not solve your financing problem if you do not have enough. On top of that, potential problems you may run into includes getting a mortgage, getting a loan or you even face bankruptcy if things go awry.
2. Getting business partners on board
Some entrepreneurs solve the problem of financing by getting other like-minded individuals on board. This means that you can share the startup capital cost or even have someone working alongside with you. The main concern is that if the majority of the funding comes from someone else, you may lose your say in the business.
3. Bank loans
A common source of financing is using a business loan from the bank. This may be a problem if you are a small business as the credit checks are stringent and paperwork processing may take too long for you.
4. Business loans from a legal moneylender
Yes, you read that right! You might have assumed that licensed moneylenders only provide personal loans, but that’s not true. Many of them also provide business financing for small businesses. In fact, they seek to fulfil the needs of small business owners by granting easier access to these loans compared to banks. That said, the interest rates may be higher compared to a bank loan, so weigh your pros and cons before making a choice. They could, however be a good source of financing for those who have some short-term cashflow problem.
You may not have heard of this word before, but it can be an efficient method to get financing to ease business cashflow. Factoring is a financing method where a company sells its receivables at a discount to get cash upfront. It’s often used by companies which need to fill orders before they get paid.
Consider this, if you own a business selling socks that you are importing from Thailand, you’d need to pay your suppliers upfront even if you already have a big retailer ordering the socks from you. Using invoice factoring, entrepreneurs can sell their unpaid invoices to banks and other financial institutions at a discount and receive the money. Other than receiving the money fast, it also means you get to keep your credit low.
6. Venture Capital
Getting your financing from venture capitalist(VC) may not be an option for everyone. You need to understand that VCs are extremely profit-driven and largely invest only in high growth sectors and products driver by technology.
However, if you are looking to develop a new tech product which you think has a good potential, you can pitch to venture capitalist to grant you funding. You will need to expect that they will take an equity position in your company and can put pressure when the company is not putting in the returns they expect.
Thanks to crowdfunding websites like Kickstarter and Indiegogo, you can now raise money for your new business with a little bit of help from people who love your idea. Besides raising money, crowdfunding also gives you a good platform to gauge whether your business idea makes sense before you take the plunge. Do make sure you read the fine print before selecting a crowdfunding site though; they do take a cut out of the raised amount.