How to Finance a Business

Any business idea needs money to transform it into a reality. Whether to develop a new idea or to expand an existing business, obtaining funds can be quite a challenge for the companies. Below are some of the ways in which businesses can get funds for their businesses.

1. Bootstrapping: Getting funds for a new business idea or for a new entrepreneur can be very difficult almost next to impossible. Self-funding, i.e., putting one’s own savings or borrowing from friends and family can be a good idea in such circumstances. Borrowing from friends and family be advantageous in terms of flexible interest rates and repayment. However even they should be made aware of the complete business plan, the financial projections.
2. Crowd funding:  Small amounts of money are raised from a large number of people though the internet and other social media sites in crowd funding. In this method the entrepreneur puts out the entire business idea on a social media site and asks for people to invest. Even small donations are acceptable.
3. Angel Investor: A wealthy individual who provides funds usually in exchange for an equity ownership in the company is an angel investor.
4. Venture Capitalist: A venture capitalist is an individual or a firm that invests in start-ups. In case of a venture firm it invests the money pooled from large companies, pension funds and investment companies in the start-up.
5. Debt Financing: This is a traditional way of financing the business by borrowing money. In this method the business borrows money from a lender (could be a bank or any other lender) and repays the money over a period of time with interest. This is a traditional, quick and easier way to get funds. The different ways in which a business go in for debt financing are

a. Term Loans: This is a traditional method used by businesses to borrow money especially for longer periods of time. In order to be able to get the loan, the business must have strong credit and be financially sound.

b. Business Line of Credit: This is a funding option for those business which have uncertain capital needs. The business can draw funds whenever it needs it and the advantage lies in the fact that it pays interest only on the cash drawn. Also, once the funds are paid back the business can once again withdraw cash.

c. Equipment Financing: In this case the debt is used to purchase equipment needed for the business. This funding option is used to purchase or lease an equipment.

d.Invoice Financing: Businesses get funds against their accounts receivable.

e.Short-Term Loans: When a company needs quick funding it goes in for a short-term loans.

6. Microloans/ Loans from NBFCs:  When a business cannot avail a bank loan because either it does not meet the bank requirement or does not have a favourable credit rating; in such cases companies usually turn to Micro Finance Institutions or the NBFCs. Businesses can avail loans with minimum documentation and also without collateral.

7. Government Grants: There are a number of Government schemes too which aid young entrepreneurs. For instance, the StartUp India initiative launched by the Prime Minister Narendra Modi encourages entrepreneurs by providing funding to the start-ups.

The entrepreneur or business owner must first determine how much funds are needed. All the funding options must then be carefully scrutinized and the one which fits the company’s business plan must be chosen.

Need help with Financing your business? Contact experts at Fincomienzo for a one-to-one session on business financing and know the best foot forward.