Financing
Business financing comes from sources such as investors and grants, or from your own accounts. While complications can arise from investors, a new business must have a stable starting cash flow. There are several different ways to finance a new or existing business. The most popular means and the pro's and con's of each are outlined below:
Debt Financing - When a company raises money by selling bonds, bills or notes to investors, promising the return of the original investment will be repaid with interest. Investors will want to see a business plan to feel comfortable with lending you their money.
Pro's:
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A contract for Debt financing will ensure the investor will be repaid and that ownership of the company remains with you.
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Original and interest payments back to the investors are considered business expenses, which can be deducted from business income taxes.
Con's:
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Repaying the investor is a must. A contract should state that even if the business does not do well, the investor gets their money back, before anyone else.
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Credit ratings will show each loan you receive from investors. The more you borrow from an investor, the higher the interest rate is.
Grants - An organization such as the government and affiliated agencies may award a sum of money to small businesses to promote growth and improvement for the business and the public community. Unfortunately, small businesses and individual business owners do not receive federal grants directly. The government gives the grants to non-profit and state governments, which in turn give them to small businesses.
Pro's:
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"Free" money that is granted normally has restrictions as to how the money may be used within your business.
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A helpful resource, http://www.sba.gov - An administration that supports small business financing, development and advocacy. With direct contact with the federal government, this is a stable and highly reliable source for financing a small business.
Con's:
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Associations and state given grants are coveted by thousands of small businesses, which mean that business owner competitiveness for grants is intense.
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Again, if a grant is awarded to your business, restrictions on how you are allowed to use that money may create complications.
Equity Financing - Raising money by giving a fraction of business ownership to shareholders, in exchange for money. These shareholders can be anyone from friends and family to "angel investors".
Pro's:
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Few "strings attached". Contracts are straightforward and clear with little room for misinterpretation.
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"Angel" investors offer larger amounts of money as well as business mentoring and networking opportunities.
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Some investors will have excess money, in case you are looking to grow your business after their initial help.
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Credibility within your business trade can be improved.
Con's:
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A one-time source of money, unless the investor has more to give once the business has proven successful, which is used for growth.
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Mixing family and friends with business can be complicated and a very bad idea if the business does not do as well as hoped.
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"Angel" investors are hard to find.
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Some investors are only interested in a fast growth plan, and partial control of the business.
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Dependency on these investors can become a problem.
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