Pointers In choosing The Right Source Of Finance
We all at one time or another in our lives find ourselves in need of loans or financial assistance. You may choose to get a loan or assistance from family, friends, investors or even banks.It is difficult and time consuming to choose the right source of getting your loans or assistance. It is important to weigh the costs and benefits before settling on any institution to offer you funding. This article seeks to enlighten us on things we should take into consideration before settling on a source for your business finance.
The first factor you should consider is the risk involved. Unforeseen occurrences may affect our ability to pay our debts. If we choose to borrow from family and friends, we should weigh the repercussions of not being able to pay the loan on time on our relationships. Banks may hesitate offering funding for your company if you are a start-up, owing to the lack of credit history. If your business is just starting or has had credit difficulties before, financiers will often charge high returns on the investment they make.Weigh the risks involved in acquiring funding from these institutions before making a decision.You ought to ensure that your debts do not outweigh your equity or else your business will be in trouble.
You should also consider control of your business when choosing the right financing option. Banks and other money lending institutions lose the right to follow up on your business once you are done paying your loans.This is not the case for investors since they maintain the right to follow up on your business until you are able to buy them out. If you would like to continue being in absolute control of your business once you are done repaying your source of finance, it is better to acquire loans.
The cost of finance should also be considered. Every business’ goal is to minimise the cost of finance and maximize returns acquired. If you choose to finance your business through borrowing, costs you will incur include interest rates, broker’s fees and origination fees. On the other hand, when you choose investors as your source of finance, costs you stand to incur include dividends. It is important that you weigh the costs and benefits of all sources of finance and choose one that costs you less.
We should also consider whether we require short term or long term funding when sourcing for finance. Long term loans are given for non-current assets and are repaid over long periods of time unlike short term loans that require payment in a matter of months. Choose the source of finance that brings in more benefits than costs.