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Different Ways to Finance a Business

6 April 2020 No Comment

Starting a new business comes with a wide host of challenges and hurdles. The first and foremost challenge is to secure funding, which can be burdensome in any economic landscape. Whether you seek funds to invest in a startup or require capital to breeze through challenging times. Securing funding is more difficult than ever.

Even though the financing and lending market has welcomed a wide array of new products and funding solutions, each loan product comes with strings attached, hidden costs and burgeoning interest rates. However, research is a dynamic tool that can help entrepreneurs broaden their horizons and identify new vehicles of funding.

In this article, we will walk you through different ways to finance a business and secure funding.

Here’s everything you need to know:

 

Dip into your Savings

Using your savings to finance your business is indeed the easiest methods. You will not be incurring any debt or liabilities, and you can retain complete control over your business. Personal savings eliminate the possibility of entering a partnership, and they do not cripple your financial health with interest rates.

However, if your business venture is a risky operation, you will be risking your hard-earned wealth. Despite the risk factors, experts advise entrepreneurs to finance their businesses with their savings as opposed to taking loans. Just make sure that you have a pragmatic and realistic business plan before taking the plunge.

 

Small Business Loans

Some many financers and lenders facilitate small businesses with short-term loans and working capital. Businesses can open a line of credit, obtain equipment financing, accounts receivable financing and other forms of credit. These business loans come with minimum hassles and liabilities, and facilitate businesses in obtaining urgent financing.

Securing bad credit small business loans can be difficult, especially if you are dealing with banks and traditional lenders. However, there are many lenders and financial enterprises that aid businesses and entrepreneurs with poor credit scores and liabilities.

Factoring

Factoring is a prominent method of securing financing by selling the accounts receivable of a business. A business sells its accounts receivables at a discounted rate to obtain upfront cash payments. This is a viable strategy for businesses with poor credit scores, and clothing manufacturers commonly use it. Factoring is an effective strategy for all businesses that have to provide orders before getting paid.

However, many experts believe that it is not a cost-effective strategy to secure funds. The exchange of receivables makes factoring extremely competitive, and it can also diminish the market reputation of a business over time.

Secure a Bank Loan

Applying for a bank loan is one of the most prominent, traditional strategies for securing funding. However, over the years, lending criteria and standards have become much more stringent. Banks require healthy credit scores and income to debt ratios, alongside a solid business plan. However, there are many banks, such as the Bank of America, and J.P. Morgan Chase, which offer small business loans.

These private and public banks offer a wide array of financial products, grants and loans designed for small businesses. Many entrepreneurs fail to benefit from such products due to lack of research. So be sure to conduct thorough research on all the financial products and funds allocated for small businesses. There’s certainly no harm in applying.

Credit Cards

If you need to secure one-time funding or working capital to breeze through a challenging situation. There’s no harm in using your credit card to finance operations. However, treating a credit card as a funding source is extremely risky. If you fail to make your payments, it will wreak havoc on your credit scores and financial health.

It is advisable to make minimum payments, or else you will find yourself digging a never-ending credit pit. Be sure to use your credit card responsibly, just to get your business out of occasional challenges.

 

Funds in your 401(K)

If you have just taken your retirement and seek to start your own business, your 401(K) is a lucrative source of funding. The funds that you have saved up in your 401(K) over the years can be used to finance a small business. More importantly, this strategy allows you to tap into your savings without incurring tax payments. Just be sure to follow all the mandatory legalities and guidelines.

These guidelines can be legally challenging, so be sure to gain the expertise of an experienced professional in establishing a C corporation. Also, keep in mind that once you invest your nest egg into your business, a lot can go wrong. So, move ahead with a pragmatic and solid business plan that nurtures your nest egg towards wealth generation.

Crowdfunding

Crowdfunding is a remarkably lucrative medium of securing funding and raising money for a creative project. Crowdfunding sites, such as Kickstarter.com, allow you to set your goals and raise money over a specific period. Anyone can pledge money to your projects, including your friends and family members.

In recent years, Kickstarter has emerged as a popular medium of raising money for fashion brands, music albums, documentaries and more. However, this is not a reliable medium for securing long-term funding. It can be regarded as a medium for one-off support to get your business started.

Friends and Family

If you don’t want to undertake the burden of rising interest rates and strict bank procedures, this is a viable strategy. Consider asking your family members and friends to invest in your business. You can borrow money through a structured loan agreement, which would be similar to borrowing from a lender or bank. However, it wouldn’t accompany tough repayment schedules and rising interest rates.

You can also bring in your family members and friends as investors, and carve out partnership agreements in exchange for capital. It is a much simpler and easier process; however, there’s always the risk of ruining precious relationships by involving money matters.

SUMMARY

Each funding method and the medium comes with its pros and cons. As an entrepreneur, it is important to weigh these pros and cons and make pragmatic decisions. Don’t prioritize upfront cash and quick payments by ignoring the long-term costs and financial burdens. We strongly advise entrepreneurs to conduct thorough research on all the funding mediums and methods available to them.

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