What are the Right Funding Sources for Your Business?

By: Devora Witts

Every business goes through a situation where extra money is needed at least once in its lifetime. Most probably, a healthy business will need money from time to time in order to increase or optimize production. The source of the cash may vary and according to the business's type and stage some sources are more advisable than others.

Common Situations When A Business May Need Extra Money

When a business is starting up, the need of money is frequent. In order to put a business to work there are a lot of expenses that need to be covered and many arrangements need to be made. At this stage, the best source of money is private investment: Individual's savings that will become part of the company's equity.

Resorting to lenders at this stage is rather risky, the business is yet immature and the interest rates charged for business loans will be too high if approved. The only solution to obtain a loan with good terms would be to request a personal secured loan but you would be risking your own assets which conflicts with the idea of separation between a business possessions and that of the owner.

Another situation where a business may need funding comes around when an increasing demand of products exceeds the company's ability to keep up with production. This situation is usually called bottle-neck and the solution usually calls for funds for purchasing new equipment and hiring more personnel. Banks and private lenders are keen on these situations since chances are that once the funding problem is resolved, the company will increase its income considerably.

Thus, this is the perfect time to resort to borrowing the money in the form of a business loans. An already running business will not have difficulties obtaining a business loan at this stage. Nevertheless, if larger amounts are needed or if the company's income is expected to increase moderately, it is wise to consider inviting new or existing shareholders to contribute with money to the firm.

General Rules That Need To Be Taken Into Account

Unless you are sure you will be able to meet payments, turning to banks and private lenders as a source of finance is rather risky, especially at the first stages. If you choose to apply for a loan, learn which type of loan best suits your needs. If you can secure the loan with any asset, this can considerably reduce the amount of interests you will have to pay and may make monthly installments more affordable.

Bear in mind that there are some business financial options that have many benefits for starting businesses and are specially meant for them. Leasing is probably the best source of finance for acquiring equipment, especially technological equipment since monthly payments are tax deductible and do not affect your capital and debt accounts. Instead the monthly payments are considered to be rental fee until the purchasing preference is put into effect.

Be especially careful when looking for partnerships that may considerably alter the ownership positions. New shareholders will have, depending on the company's type, word and vote in company's decisions. Be sure the new investors are aiming the same goals and wanting the same bright future for your company before agreeing to any transaction that may turn you from king to pawn.

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