Business Funding Strategy
Your business funding strategy should depend on the type and scale of the business you intend to start, as well as your level of experience and the financial resources available to you. The decision of how to fund a business is highly personal, and it also involves evaluating whether you are starting a business to pursue a passion, or whether your primary goal is to maximize profit.
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Private Funding Options
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Assess the funding options available to you. Personal funds offer the advantage of not having to fill out applications and make formal scheduled repayments, but using your personal savings for a business venture can leave you in a financially precarious position. Personal loans similarly tend to be relatively informal, but borrowing money from a friend or relative and then failing to pay it back can jeopardize invaluable relationships. Before embarking on a personal solution for business funding, fully understand the financial and emotional repercussions of risking your own assets, or those of someone you love.
Financial Institutions
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A variety of financial institutions provide capital for business ventures. Credit card companies provide unsecured loans each time you use them to make a purchase or take a cash advance. High interest rates make them one of the most expensive sources of funding. Bank loans and SBA loans require considerable amounts of paperwork as well as collateral, or personal assets to guarantee that you will repay the sum you borrow. But interest rates on these types of loans tend to be relatively low, making them a sensible strategy for business owners who qualify.
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Multiple Sources of Funding
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Most small businesses develop a funding strategy that makes use of multiple revenue streams. Business loans usually cover specific projects such as purchasing property or equipment, or expanding into new markets. Personal funds and personal loans are especially useful for start-up expenses, before your business has developed enough of a track record to seek funding from a financial institution. Business credit cards are useful for funding day-to-day purchases, especially when you will be able to pay off your balance quickly without accruing much interest.
Returns on Investments
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Whatever funding strategy you use, carefully calculate whether the return you expect from using the capital will balance the expense of borrowing it. If you borrow money from an individual or a financial institution, prepare cash flow projections to plan how and when you will pay it back. Also, project forward beyond the period that it will take you to pay off your loans to understand the true value and consequences of infusing capital into your business, such as improving your company's equity or profitability.
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References
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