Choosing the most appropriate source of funding for your business requires careful consideration and a well-thought decision. This is usually a challenging decision for most business proprietors, and it calls for a well-thought approach. As much as you will find various sources of finance around, not all of them are suitable, and they also have different financing conditions. In making your decision, you should not only look at the advantages of the source of finance but also the disadvantages that might accrue. This article discusses the main factors that influence the choice of a particular 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. It is prudent to think about the possibilities if you do not pay the money. There are several uncertainties involved in business, and sometimes, you might not pay the loan in time, and you must think of the possible scenarios that can occur in case this happens. If it was a soft loan from a friend, it can spoil your relationship and even taint your reputation. For a financial institution, they will obtain a court order to sell the business assets to collect their money.
Interest rate – The interest is the cost of getting the funding. Every business proprietor is rational and would want to minimize the costs so that he can operate profitably. The least-cost source of finance will not be a huge burden to your business, and thus, you will pay it comfortably. As you consider the interest rate, you must also think about the time required to repay the money. You can compare the costs of various sources of finance and also consider the repayment period so that you are not frustrated to pay the loan within a short time that is not reasonable.
Amount of borrowing – How much does your business require from finance? The amount of borrowing will determine the source of finance that will fund it easily. In some cases, you might receive large sums of money from particular sources that have restrictions. Sources of finance are also suitable for obtaining small amounts of money.
Type of expenditure – How do you intend to spend the money? There are different types of expenditures in a business and they can influence the source of finance that you choose. The purpose of the finance plays a significant role in selecting the source where you will get it. Capital investments require long-term financing while revenue expenditures can be sorted out using short-term loans.
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.