Financing is usually one of the main obstacles that arise when starting a business. Although there are excellent business plans and good products, it will be worth nothing if you do not have the appropriate financing to maintain the business. There are various sources of financing or funding your new business, but each has its limitations. Know how to get pre seed funding by researching all expert opinions.
You should also keep in mind that good business practices cover the payment of debts and the fulfilment of the obligations you have towards investors.
One of the ways to finance a business is to take a loan through which resources become available in bulk at a specific point in time. One needs to consider merchant cash advance for bad credit.
Financing resources can be grouped into four categories according to the responsibilities of the business owner.
Personal assets constitute the preferred financing option to funding your own business. The business owner must be accountable to himself and the profits generated must not be paid to anyone. So, if the investment does not yield any profit, the owner is the only person who loses money. Remember not to invest anything you are not willing to lose.
PERSONAL FINANCING OPTIONS:
- Sale of investments
- Sale of some assets
FRIENDS AND FAMILY
This option requires paying other people part of the profits obtained. But without the rigidity of professional lenders, who ask for guarantees. Friends and family already know your ability and can determine your business plan working. While friends and family are more likely to be sympathetic if your business suffers an inevitable setback, you must still fulfil your commitments. It is important not to run the risk of losing friends or relatives moving away from you.
PRINCIPLES TO REMEMBER:
- While funding your new business, do not borrow an amount of money that a person cannot afford to lose.
- Before a person invests, ask him how he would handle the situation in case his business was unsuccessful, and you could not pay him immediately.
- Establish clear conditions on loans. If the amount is considerable, ask a lawyer to write an agreement. It is better to have things in writing rather than relying on memory to solve any disagreement that arises. Set clear expectations so that there is less chance of disagreements in the future.
They are the funds that are received from people who will have property rights in the company in exchange for their contribution. This option does not necessarily mean that the investor will receive part of the earnings. But it will have an active role in decision making. If you make such an agreement, you must clearly define expectations to avoid misunderstandings. For example, it is necessary to define if a partner will participate in the day-to-day administration of the business. Or if it will only be a capitalist partner, with little or no participation in decision-making regarding the administration of the company.
FUNDING YOUR NEW BUSINESS THROUGH DEBT
It is the traditional way to borrow money. In which a business owner asks for a loan from a bank or an entity, and has to meet the requirements to receive it. The owner has to pay the loan, plus the corresponding interest, through scheduled payments.
INVESTMENTS OF OWN FUNDS IN PROJECT
It is the easiest way to funding your new business. An entrepreneur organizes a business at his own expense. He is an investor in the project. The Entrepreneur fully controls the profit from the business. He disposes of it at his discretion.
- The entrepreneur decided to create a new business
- Entrepreneur funding new business from its resources
- A new business is profitable
- He invests part of the profit in the business. It is part of the personal consumption of the Entrepreneur
RISKS FOR ENTREPRENEUR
- Inability to project
- Failure to obtain a profit or loss-making business
- Loss of business or ruin
CO – FUNDING YOUR NEW BUSINESS WITH A PARTNER
When the Entrepreneur’s funds are not enough, he can invite one or several partners to collect the necessary amount. In this case, he distributes the profit from the business over a larger number of shares. Part goes to business development, and he distributes the rest between partners. The risks of doing business also increase due to potential conflicts between partners.
- The entrepreneur decided to create a new business
- The entrepreneur finds a Partner who is readily investing his money in a new business
- The entrepreneur and Partner finance the new business from their funds
- The new business makes a profit
- The entrepreneur invests part of the profit in the business. The part is distributed between the Entrepreneur and the Partner by agreement.
THE RISKS OF ENTREPRENEUR ARE:
- Failure to implement the project
- Lack of profit or loss in business
- Conflicts between partners about running a business or distributing profit – Partner withdrawal business
To exclude possible conflicts with partners, you may instead of partners find a lender who will help in funding your new business with a loan for business development. In this case, he takes all the profits from the business to himself. Part of the profit goes to repay the loan with interest.
Eliminating the risk of conflicts with partners, the Entrepreneur receives possible conflicts with the Credit. We assume that the Entrepreneur conducts activities as an Entrepreneur without the formation of a legal entity. If you want to get a loan, you can consider merchant cash advance for bad credit.
In the case of non-repayment of the loan, the Lender may take not only his business from the Entrepreneur but even his personal property.
- The entrepreneur finds a lender who is ready to provide a loan
- The entrepreneur receives a loan
- The entrepreneur finances a new business from his own and received funds
- Entrepreneur returns loan from profit
- Inability to project
- the loss of income
- Business loss or devastation
- Conflicts between the Lender and the entrepreneur about the loan repayment
- Possible loss of business and personal property, if it is impossible to repay the loan
JOINT VENTURE WITH FOUNDING PARTNERS
To reduce the risks of losing personal property, with partners, you can organize a company as a legal entity with limited liability for its obligations.
Founders contribute the authorized capital that is necessary to create a business. They make shares in the company and the distribution of profits from the business in proportion to contributions to the authorized capital.
- The entrepreneur and Partner create a new Firm for doing business
- The entrepreneur and Partner contribute their funds to the authorized capital to finance the business
- The new company finances is a new business from the authorized capital
- They distribute a part of the profit in the business. A part is distributed between the Entrepreneur and the Partner in proportion to the investment entry into the authorized capital of their investment.
ATTRACT NEW INVESTORS
There is a financing method that is widely used by entrepreneurs who want to get quite a lot of financing. At the same time, they can keep a share in the authorized capital in the amount of 50-80%.
Entrepreneurs register a Company with a small authorized capital and begin to organize a business. After that, they develop a program of implementation which requires a lot of funding.
To receive finance, investors are offered a share in the authorized capital from 20 to 50%. Entrepreneur sells this share for the required amount to several Investors. The presence of several investors guarantees the reliability of the future business for each Investor.
To determine the best financing options for your business, prepare a detailed financial analysis in your business plan. For more information regarding business plans and financing, see How to prepare a business plan and Personal finance versus business finance.