What type of finance is best for your business?
Here’s a simple way to determine the financing option that suits your business the best.
Thursday September 21, 2017,
5 min Read
Sufficient finance and efficient use of it is the key to running a successful business. Obtaining funds to tide you through financial slumps and booms is necessary, but it is equally important to plan for business growth. It may not be possible to get the funds to boost the growth of your business from within its own profits. It is therefore important for you to have a reliable external source of Business Finance.
When you look for a good source of funding for your business, you have a choice between equity finance and debt finance. Equity finance involves investing your own or someone else’s money into your business. Debt finance means borrowing money that must be paid back with interest, within a fixed time.
Sources of equity finance
Venture capitalists or angel investors - Venture capitalists are professional investors who put their money in companies that have high income potential. Similarly, angel investors are private investors with a high net worth. They provide funds as well as guidance, in return for an ownership stake in your business.
Family and friends - You can ask a relative or friend to invest in your company. In exchange, they get a stake in your company. This stake can be in the form of company stocks or profits. However, experts usually advise business owners to not mix personal relationships with professional ones, to avoid complications.
Crowdfunding - Here, people donate money to your business if they think your idea is profitable. This type of equity financing can be used if you have a product or service that has the potential to excite the masses.
Public floating - You can raise the money required for your business by issuing securities to the public. If your company is worthy of investment, the public will buy company shares and you will get the funds you need.
Sources of debt finance
Equipment lease and hire purchase - Equipment lease and hire purchase are forms of debt finance that can be used to acquire assets for your business. During a cash flow crisis, they offer a low-risk and affordable alternative to purchasing new machinery or equipment. You can use this form of finance to lease equipment for your business. You can pay off the cost in regular instalments while retaining the use of the equipment. Thus, you add assets to your business, and use those assets to simultaneously contribute to business growth.
Overdraft of business account - You can borrow a fixed amount of money from the bank, even if your business account has no funds. This is a type of temporary loan. But remember, any overdrafts have to be repaid at a very high rate of interest.
Business loans and other customised loans for SMEs - Financial institutions offer a variety of loans to meet all the requirements of small and medium enterprises. You can choose a working capital loan to manage day-to-day finances, or a machinery loan to purchase new equipment. You can also choose a business loan, which can be used for all business-related financing needs. The interest rates of these loans are nominal, and the availability of a line of credit means you get the flexibility to use only the funds you need, when you need them.
Features Of Equity Finance
Shared ownership leads to loss of decision-making power - You will become a co-owner once you avail equity finance. This may help in making informed, well-planned decisions, but you won’t be the only person with the authority to make those decisions.
Can affect personal relationships - All businesses experience profits and losses. But, if relatives or friends who provided equity finance for your company suffer losses, they may blame you. This could strain your personal relationships.
Is more competitive - Equity finance is sought after by a majority of businesses. You may find yourself competing against companies that offer similar goods or services to yours, which reduces your chances of getting the funds your business need.
Features Of Debt Finance
Complete control and ownership - Debt finance allows you to be your own boss and make your own decisions. It also means that whatever measures you take to grow your firm, they remain your sole responsibility. All profits come to you directly, but you also have to take on any loss alone.
Financial discipline - Debt finance provides a disciplined way of repaying borrowed funds. It ensures you follow a fixed routine, and abide by it, regardless of financial obstacles. So, it instils financial discipline, which is a highly valued skill for any business owner.
No obligations - Taking a business loan from a financial institution only impels you to pay the loan back to them with interest. You do not owe the lender detailed explanations of what you plan to use the funds for, nor do you have to take their advice or permission anytime you need to make financial decisions for your business. Once the loan is paid, you do not owe the lender anything. Thus, you retain the freedom to build your business as you see fit.
If you think debt financing is a viable option for you, apply for a Business Loan by Bajaj Finserv. It offers benefits such as:
1- Funds up to Rs. 30 lakh
2- Quick processing, with approval in 24 hours
3- Very few documents required
4- Easy online application facility
5- Simple eligibility criteria
6- Nominal interest rate
7- Online account management
8- No restrictions on use of funds
9- Availability of business line of credit
Also Read: How To Secure Finance For Your Business?