We are in turbulent times, the economy is going through a crisis. You may have excellent management, products or services, the best sales and service methods but you can change outside forces. It is important when planning for growth that you have robust strategies for a well-managed company and contingency plans in place.
More money is not the answer to your business growth problem, if you are running an inefficient business throwing money at the company will not make it more efficient, only more wasteful. If you have exhausted all self-financing possibilities to fund your growth then you must make hard decisions on the best method to finance your growth.
There were two business finance option: debt financing and equity financing. Debt financing is simply a loan from a bank or investors. Equity financing is giving the investor a share of your business in exchange for their investment of capital. Here is the advantages and disadvantages of both finance options:
The Advantages of Debt Financing:
You are in control of your business. As your business grows, you keep all the benefits of that growth. You know exactly how much you have to pay back on the loan each month because loan payments generally do not fluctuate. As a consequence, it is easier to organise your budget. Debt financing also offers tax advantages as interest and capital are deductible from your business income taxes.
The Disadvantages of Debt Financing:
You can lose the control of your business if your lender demands repayment of the loan. If you do not make the payments on a loan, it can affect your ability to obtain future financing. Since bank may seek security for the loan, it can be difficult for a small businesses to get finance. The interest of the loan can be high.
The Advantages of Equity Financing:
The investor can be like a distant partner or a close mentor in to the business supporting the companies’ initiatives. If the investor is a close mentor, he (she) can bring their experiences, skills and help develop the business. Investors can provide further future funding as the business grows.
The Disadvantages of Equity Financing:
Investors can have an influence in your business that is contrary to your ambitions. It can create potential conflict if there is a different vision for the business. The profit share given to your investors may be higher than if you repaid a debt.
There are also alternative finance options such as peer to peer and peer to business lending, reward-based crowdfunding has grown in popularity, however it is an unlikely source for medium-size business who might look at crowd lending platforms.
Before searching for funding options, think about what you want and need to achieve in your business ambitions. How much control do you want? Are you looking for a mentor to help you develop your business activity? This is an opportunity to not just look just for funding, but to look for the elements which will enable you to achieve your business objective.
Make sure you have a robust business plan. It is important that your plan of activities is update with well researched financial projections. Think about what is the best choice for your business objective short and long. Your business plan must clearly state your business goals and your strategic plans to develop your business activity with a well-researched target market and marketing plan.
Whether debt or equity finance backers are looking for efficiently managed companies. Be prepared to present and defined your business plan to the potential investors. A good starting point is to research your finance options is funding options.
This article was written by Minh Nguyen who is working with Janice B Gordon if you enjoyed it please send us your comments.