For every prospective business it is extremely important to seek different sources
of appropriate funding. When an
entrepreneur is able to successfully raise the desired
amount of capital, the new business will be able to thrive. It may take a considerable
amount of time to break-even and earn revenue; therefore, having this type of financial
security is beneficial for the entrepreneur and the viability of the
new business.
A new enterprise needs capital to finance its everyday business expenses. This can
include property rent, employee salaries, marketing expenses, inventory, day-to-day
operations, and maintenance.
Working capital
The capital used to finance such daily operational costs is referred to as the âworking
capitalâ of the company. An entrepreneur should meticulously calculate the working
capital before requesting a hypothetical amount as well as have a clear understanding
of all the different funding options
available in the market. This will help him/her select the type of funding that
is appropriate for his/her company. Loans can be arranged from personal resources
such as friends, family, and business associates. Though pooling money from loved
ones can be effective to some extent, it will not provide entrepreneurs with the
entire amount they will need to sustain their
new businesses. A capital loan may
be easier to get, but it has its share of drawbacks as well.
Capital loans
A capital loan is a large amount of money that is provided by traditional lending
institutions and banks. There are short-term and long-term loans available to finance
the daily operating costs of a
small business. One downside is that even though
the lending institution may have an excessive amount of funding available, they
may be apprehensive about lending a large sum of money to a new entrepreneur, especially
if they do not have any business experience. A second problem is that the entrepreneur
will be responsible for timely monthly payments. If the entrepreneur defaults on
payments, s/he is putting the business relationship at risk. The availability of
such loans depends entirely on the amount of
funding needed and the entrepreneurâs convincing ability that the prospective
business will be a success.
Trade creditors
Entrepreneurs who do not intend for their company to go public in the near future
may find it very hard to obtain such a loan. They can
find funding from trade creditors who will lend money on the condition that
the borrower purchases bulk goods from them. But keep in mind that both trade creditors
and banks rely heavily on the business credit score before lending any amount of
money. A credit history is extremely important in determining oneâs financial reliability
of paying off owed debt. If a personâs credit history is poor, they will more than
likely be denied by banks and trade creditors.
Equity capital
Venture capitalists and angel investors are also popular
sources of small business funding. A brilliant management team and a rapid
future growth plan are some of the prerequisites of obtaining equity capital from
business investors. One downside is that entrepreneurs may have to give up a percentage
of ownership of their company to accommodate the business investorsâ demands. In
addition, angel investors and venture capitalists may also require a board seat
and regular involvement in company operations to ensure the protection of their
investment. The process of obtaining angel investor capital or
venture capitalist
funding is an extremely competitive process since both types of business investors
have strict guidelines as a requirement.
Business cash advance
For those who are not successful at obtaining a small business loan, a business
cash advance may be one viable option to consider. In recent years, a business cash
advance has become one of the most popular and sought after form of
working capital funding. The borrowers do not have to worry about expensive
repayment fees nor do they have to maintain an overall good credit score. The repayment
is highly dependent on the volume of sales of the business; therefore, the borrower
does not have to bear the burden of repaying the money on a monthly basis. The acceptance
of credit cards as a mode of payment is a prerequisite for a cash advance, and repayments
are made through future credit card sales of the business.
Conclusion
In summary, obtaining capital to finance the working capital needs of a small business
is not really a difficult proposition. There is a lot of
funding available on the market for the budding entrepreneur, including
bank loans, equity capital, trade creditors, and business cash advance. Although
they all carry benefits and disadvantages, the decisive factor is the ease of repayment,
liability burden, and flexibility of terms.