Businesses require a lot of time and effort in order for them to thrive and give back to you. Also, they require you to pump money into them for a while before they start making you any. Because of this, you will find yourself in need of investor funding a lot, especially in the beginning stages of your business.
There are a number of options that you can venture into when it comes to business funding. We shall, however, look at the three main types of investor funding.
When you hear about business funding, the first thing that comes to mind is loans. Be it bank loans or loans from other businesses, the most common source of funding for most startups is loans. This is because the terms of loans are easy to understand, and though the actual details of any loan may differ, the basic terms are similar; you borrow money, you pay back later with interest.
The most common sources of loans are banks. This is because banks deal with a lot of money and are thus able to access even huge amounts of money easily. The main catch, though, is the fact that the amount of money you will be given or are credible for will be determined by a number of factors: how long you have been in business, how well the business is doing, and it’s credit score if any.
That brings us to another point. When looking to get a bank loan for your business, you have two options. First, you can choose to take out a bank loan in the name of your business. This is where the previously mentioned factors will come into play. Your second option is to take out a bank loan in your name. Now, in this case, it is your credit score that will determine the amount you are given, and the interest rate charged. You should, however, note that you are the one liable for the loan, not your business. As such, should your business fail, you are the one who will need to pay the loan; it is your credit score that will be affected, and your personal collateral is what the bank will come after should you be unable to pay.
With that being said via www.nation21loans.com, loans have been found to be the most reliable sources of funding, mostly because the terms are clear cut. When should you go for the loan option? Well, the easy answer is to apply when you need a small amount to get started. You see, with loans, there is no way of pushing the terms forward, at least not without an extra price to pay. That being the case, you should only go for the loan option when you know you need a small amount of money that you are sure, come what may, you will be able to pay back.
Secondly, you should consider taking out a loan when you need money urgently. As we shall soon see, some of the other investor options require you to wait for a longer time to access the funds. With a bank loan, for instance, you are able to access the money as soon as the documentation is done, and your details are clarified.
Simply put, equity investment is when you evaluate your business and come up with a figure on its value. Then, investors give you money that then translates to their ownership of a part of your business. When your company sells or goes public, they get compensation according to the percentage of your business that they own. This can be done by company investors or individual investors who can be friends or even family. Why choose equity? There are a number of situations where equity may be the best option for you.
For starters, equity is the most reliable source of funding when you need a long time to pay back the money. You see, unlike with bank loans, equity does not require money to be paid back at a specified time. You, therefore, have time to make that money make more money for you without the pressure of a due date. Secondly, equity gives you a good foundation when you have no money whatsoever to start up. If you are able to evaluate your business and come up with its value, yet have no money to start it off, an equity investor would be your best option. This way, you are able to begin and actually build up the value of your business.
The main disadvantage of equity funding is the fact that equity investors look forward to the liquidity of your business, so your business idea either needs to make money fast or is able to have an IPO running soon. Before equity investors even think of investing in your business, they need to know that your business can not only make money fast but will also sell fast, too.
What this means simply is that you borrow money from an investor that if you are unable to pay back in a specified amount of time, the debt will be exchanged for a share in your business. In essence, this option blends the first two; it is borrowed money that can be turned into equity.
Very few business owners go for this option, as it can be confusing, mostly on paying back, the interest agreed upon, and whether the shares taken will be worth the initial debt or will include the worth of the interest. For example, if you borrow $50,000 and agree to pay back at a specified time, with a 6% interest, if you are unable to honor the debt, does the investor then get equity worth the $50,000 or worth the $50,000 plus the interest expected?
This option is most applicable in the case where you are not sure about the value of your business or believe that your business will be worth much more in the near future, and do not want to offer the equity option.
No matter which investor funding you choose, be sure to pick one that works perfectly for your business type. Some businesses need incubation time to grow, like marketing companies, in which case equity would be a good option. Others start making money as soon as they begin, like a product sales company, in which case loans would work very well. It’s up to you.