When it comes to business financing, there are a variety of options available to business owners. Depending on the stage of your business and its needs, you may be able to secure a loan from a bank, attract investors, or sell shares in your company.
Picture this: your small landscaping business needs money to buy lawnmowers, hedge trimmers, edgers, blowers, and sprayers. In that event, you would turn to a financial institution similar to Coastal Kapital (or maybe a bank) for fast approval on your business loan. Much like this, there are other ways to acquire appropriate financing for your business. Each option has its benefits and drawbacks, so it’s important to understand what’s available before making any decisions.
In this article, we’ll take a look at each of the major types of business financing and discuss the pros and cons of each. Bear in mind that loans, which we will start with, are not just available from banks. For instance, somewhere like this business loan philippines company, offers solutions that will suit many businesses who don’t want to go down the route of using banks.
So, let’s learn more.
Loans
Business loans are a popular financing option for small businesses. Banks and other financial institutions are typically willing to lend money to business owners with good credit, and the interest rates on business loans are often lower than those of personal loans.
A business loan can be used for multiple reasons, including financing equipment purchases and for supporting day-to-day trading operations. However, it is critical to understand the terms and conditions of the loan and make sure you can meet the repayment obligations before taking out a business loan.
There are various types of business loans such as term loans, lines of credit, invoice financing, equipment financing, merchant cash advances, and business acquisition loans. Each of these types of loans tends to have its own advantages and disadvantages, so it seems wise to research and compare the different options before making a decision.
The downside of business loans is that they must be repaid, often with interest, over years. If your business is unable to make loan payments, you may be at risk of default and legal action from your lender. Speaking of debts, businesses often tend to take up bridging loans, which are traditionally designed to pay for business debts, purchases, working capital needs, and other such overheads. What’s more, there are many different types of bridge loan exits, so these could be used for writing off debts.
However, you need to keep track of your credit score, not just for loan approvals, but to obtain good rates. To improve our credit score we can:
- Use a business credit card for business expenses.
- Make sure we pay our bills on time.
- Keep our debt levels low.
We cannot change what has happened in the past financially but we can look to make amends by showing that we are paying our future bills on time. Also, we can set up credit arrangements that demonstrate we are a good payer. Never build up debts unless there is no choice. It pays to settle bills on time for when we require future finance.
Franchising
A franchise is when an established business allows a third-party business to operate under its trade name in exchange for a franchise fee and/or a percentage of the revenue. This allows the third party to grow rapidly and ensures business security, but they must use the franchise’s name, logo and products and operate under its policies. This gives the franchise more exposure and is a common business model used by companies like McDonald’s and Costa. This is why you see so many of these food outlets around – they haven’t been set up by the parent company, they’ve been set up by a third party operating under the same umbrella.
Financially, this is great news for the third party. They get a massive cash injection, securing funding not only to establish themselves but also to keep themselves running. It’s not just food companies that use this model either; senior care franchise earnings are calculated by established senior care companies, ensuring each franchisee is kept under the same financial policies as the parent company.
Investors
Another option for business financing is to attract investors. Investors typically provide capital in exchange for a percentage of ownership in your company. This can be a great way to raise money without incurring debt, but it also means giving up a portion of your business. You’ll also need to be prepared to share information about your business finances and plans with potential investors. If you are prepared to make the sacrifice, then it will give you extra cash to take a business forward.
Sometimes bringing in investors can add new and different expertise and ideas to a business. Be careful, though, that you are not just introducing money but also personalities that are not going to clash with existing owners and employees. There are other ways to generate finance rather than risk losing staff or control of your business.
Selling Shares
If you’re looking for a way to finance your business without taking on debt or giving up equity, selling shares may be the right option for you. When you sell shares in your business, you’re essentially selling a portion of ownership to an investor in exchange for capital. The benefit of this arrangement is that you won’t have to repay the investment, and you won’t give up any control over your business. However, it’s important to note that selling shares can be a complex process, and you’ll need to consult with a lawyer or financial advisor to ensure that you comply with all applicable laws.
No matter which financing option you choose, it’s important to do your research and understand the risks and rewards before moving forward. Business financing can be a complex and risky proposition, but with careful planning and due diligence, you can find the right solution for your business.