Factors to consider while financing the business
Businesses today exist in a new and different economic landscape that forces creativity and out of box thinking and same is true while funding these businesses. Though there are differ ways through which business can be funded but selecting a right route for raising finance not only helps in reducing cost but also plays crucial role in overall sustainability of the business.
There are numerous ways to finance a business and ample lenders and investors to choose from but choosing Whom, When and How play a very important role.
Financing can come in the form of Debt and Equity and the terms of finance can vary significantly between the two. Factors that are crucial while financing a business include the Repayment terms, Total cost of capital and the requirement of lender or Investor.
Repayment terms are very important to decide on how financial arrangement is structured. Longer tenure loans can aggregate a significant amount of interest over the time but loans with shorter tenure requires larger periodic payments. While raising funds consider the amount of periodic payment, how often the payments need to be made and how cash flow from the business supports the same.
Total cost of capital includes interest cost on loan, processing fees charged by lenders, opportunity cost involved in case of collateral offered, professing fees charged by professional agencies and other miscellaneous costs involved. Consider all these costs while calculating IRR and choosing from available options of funding.
Money from Investors may not require repayment for many years but investor may expect to be repaid at a steep premium all at once.
Understanding requirement of lenders or Investors is very crucial while raising capital. Mismatch in delivery and expectations can lead to complication between the business and lender or investor and could lead to difficultly in raising further capital for the business.
Finance is life line of any business. Regardless of whichever path one takes, choosing the optimum way of funding plays very crucial role during business life cycle. Businesses which are able to manage it well can go a long way and create a great value for its shareholders, lender and investors. Therefore, always find a viable funding solution that allows one to focus on business sustainability and profitability.