One of the main problems people often face when they want to start a business or grow the one they already have is a lack of capital.
Many people even decide to postpone or soon forget about their attempt to start a business or invest in the one they already have when they see that the money they have available is not enough for them.
However, the truth is that in these cases the lack of capital should not be considered a problem, since if our savings are not enough, there are several other sources of financing that we can turn to.
Main sources of financing
The following are the main sources of financing that you can go to to obtain the capital or money you need to start a business or grow the one you already have (for example, to acquire new machinery, launch a new product on the market, or remodel your local).
In each source, we have included its main advantages and disadvantages so that you can compare them, and thus you can choose the one indicated for your business. Also, in some cases, we will tell you how you can access the source, and we will give you some related tips.
The main source of financing for a business is usually own capital; that is, the money that we have in our house or in a bank account as a product, for example, of our savings, our liquidation as employees or the sale of some of our personal assets.
In case we need financing to start a business, it is recommended that we use our own capital, and later when the business begins to grow, just start looking for external sources of financing, since this way we are not obliged to pay interest or to return money to someone.
However, in general, in the case of small entrepreneurs or businessmen, the capital we have is not enough to start a business, so it is necessary for us to resort to external sources of financing.
- one is not obliged to pay interest or return the money to someone.
- you don’t always have enough equity capital to start a business.
If we do not have enough capital of our own to start a business, the first alternative that we could consider is our family members, who will probably agree to lend us the money we need if they are aware of our capacity and responsibility.
The advantage of borrowing money from family members is that, in general, we are not obliged to pay interest (although as soon as the business begins to generate profits, on our own account we could choose to financially reward them for the trust placed in us), or to return the money so soon and on a deadline, which allows us to work quietly in our business without feeling pressured by having to pay the money back.
The disadvantage is that by borrowing money from our family members, we could make them uncomfortable, and some of them may not want to lend us the money, but feel obliged to do so.
- In general, one is not obliged to pay interest, nor to return the money so soon and on a deadline.
- one could make family members uncomfortable by borrowing money from them.
An alternative to borrowing money from our family members is to ask our friends, which also usually saves us from having to pay interest and return the money both soon and on a deadline.
The usual thing, in this case, is that both the loan amount and the term for its repayment are less than in the previous case; but also, another important disadvantage is that we could deteriorate the friendship that we have with our friends in case we cannot return the money in the agreed term.
- In general, one is not obliged to pay interest, nor to return the money so soon and on a deadline.
- the loan amount is usually not high.
- one could deteriorate the friendship in case of not returning the money in the agreed term.
Banks are a commonly used source of financing, although a bit difficult to access for small businesses just starting out, as banks usually only grant loans to businesses that are already in business and have some experience in the market.
However, accessing a bank loan to start a business is not impossible if we have a good credit reputation, good business references and, above all, an attractive business idea with a solid business plan to support it.
In addition to being legally constituted, some of the requirements that banks usually ask for in order to grant a loan for a business are:
- business plan (generally for the case of new businesses).
- financial statements, both historical and projected (especially cash flow).
- experience in the market from 6 months to 1 year (in the case of new businesses 1 year of experience in the type of business to be undertaken; that is, 1 year of previous experience in a company equal to or similar to the one want to create).
- collateral (which could be made up of company assets or personal property, usually of a value equal to or greater than the amount requested in the loan).
To find banks from which you can ask for a loan for your business, you could go to the Internet and search in your search engine for terms such as “main banks in the town” or “banks specialized in small and medium-sized companies”, or consult with relatives or friends.
And then, to choose the right bank, you could take into account factors such as:
- the loan amount: the amount that could be loaned to you.
- the cost of the loan: which includes the interest rate charged for the loan plus other additional costs such as maintenance fees.
- The term of the loan: the period of time they give you so that you can repay the loan and pay the interest.
- installments to pay: the amounts that you must pay periodically to return the loan and pay the interest.
- the possibility of canceling the debt in advance: the possibility that they give you to be able to make additional payments in order to be able to reduce the debt, or to be able to cancel it in advance.
- The requirements: the requirements that they ask you to be able to grant you the loan (for example, business plan, financial statements, experience in the market, guarantees, etc.).
- the bank itself: its reputation, its experience in the market, its customer service, its ability to answer your questions, its speed in evaluating your application and granting you the loan, etc.
- possibility of accessing a high amount of capital.
- difficult to access in the case of small businesses that are just starting.
Non-bank financial entities
An alternative to requesting a loan from banks is to request a loan from non-bank financial entities that are preferably oriented to small and medium-sized businesses.
These financial entities are usually more accessible than banks, but just as in the case of banks, in order to access a loan for a new business, our business idea must be attractive and supported by a solid business plan.
In addition to being more accessible than banks, another advantage of these entities is that some provide advice for the creation and management of businesses at a low cost and even, in some cases, if we acquire a loan, for free.
The disadvantage is that the amount of the loan they grant is usually small compared to the amount we could get from a bank (although it is usually more than enough for the creation of a small business), and the cost of the loan (interest rate plus commissions) is usually high.
Regarding the requirements that these entities usually ask for in order to grant a loan, these are usually similar to those requested by banks, but less strict; For example, if a bank asks you for one year of experience in order to grant you a loan, one of these entities could ask you for six months.
To search for these entities, you could also go to the Internet and search your search engine for terms such as “financial entities oriented to small and medium-sized businesses in the locality”, or consult with family or friends.
Then, to choose the right financial institution, you could also take into account factors such as the amount they could lend you, the cost of the loan, the term of the loan, the requirements they ask you to access the loan, and the reputation of the institution.
- less requirements than a bank to be able to access a loan.
- possibility of obtaining advice at a low cost or for free.
- loan amount less than what can be obtained from a bank.
- cost of the loan higher than what can be obtained in a bank.
One way to finance a business is to find a partner; that is, a person who, in addition to being interested in investing with us in our business, is willing to share the risk and work together with us in its growth.
The advantage of having a partner is that it allows us to have someone who, in addition to helping us finance our business, can help us start it up and move it forward.
The disadvantage is that of having to share the profits of our business with someone, and that once the business is launched, over time there could be disagreements, differences, or disputes, especially if it begins to fail in the fulfillment of the objectives, and even more so if we have a difficult partner.
If you choose to find a partner for your business, it is recommended that you look for one with the same motivations and aspirations, that invests the same capital that you are going to invest, and that contributes, in addition to money, other resources that are complementary to those you have. such as experience in some aspects of the business, knowledge of the market, or business contacts.
- have someone who, in addition to helping with the financing of the business, helps to start it up and move it forward.
- having to share the profits of the business with someone.
- possibility that over time there may be disagreements, differences or disputes.
An alternative to looking for a partner is looking for an investor; that is, a person who is interested in financing all or part of the business investment, and who as a result receives a percentage of the profits according to what was contributed.
The advantage of having an investor is the ability to quickly access a good amount of capital.
The downside is that we may have to deal with always having to pay a portion of our business profits to someone who initially invested, and then did nothing else to grow the business.
To find an investor for your business, you could look for venture capital entities, angel investors (which, unlike venture capital entities, use their own funds and not third parties), or simply any person, company or entity that want to invest money in your business in exchange for a percentage of the profits.
- ability to quickly access a good amount of capital.
- having to share the profits of the business with someone who only invested initially.
Another way to finance a new business is to participate in contests on business projects, plans or ideas where the best project, plan or business idea is awarded full or partial financing of the business.
If you have an attractive and innovative business idea that is backed by a solid business plan, participating in these contests could be a good opportunity to obtain financing without having to pay back the money, pay interest or share the profits.
These contests are usually organized by government agencies, universities or other entities dedicated to supporting small and medium-sized businesses, so to search for them you could enter the websites of these entities or, in any case, websites dedicated to entrepreneurs who publish news of interest to them.
- possibility of obtaining financing without having to return the money, pay interest or share the profits.
- It is not always easy to find these types of contests, or win them.
Other sources of financing
The sources of financing that we have seen are those that we consider being the main ones; However, there are several other sources that we can also go to, such as the ones we present below:
- Leasing: leasing is a contract by means of which we request a bank or financial institution to acquire ownership of a good (for example, a machine or equipment) so that they later lease it to us and, once an established term has expired, we have the option to buy it.
- Factoring: factoring is a contract by which we assign to a bank or financial institution the rights to our accounts receivable, in exchange for them being paid in advance (deducting the interest and commissions that the bank or financial institution may charge us ).
- Shares: if we meet certain requirements, to finance our business we could also sell shares, which consist of titles that grant whoever owns them the right to participate in the distribution of the company’s profits.
- Bonds: if we meet certain requirements, we could also issue bonds, which consist of debt securities that a company issues by committing to pay periodic interest and to return the value of the debt at the expiration of a certain term, to whoever acquires them.
- Suppliers: Suppliers can also be a source of financing when they grant us a commercial credit; for example, when they provide us with raw materials, merchandise or an asset, and allow us to pay for them in monthly installments instead of having to make a single payment in cash.
- Other companies: other companies can also be a source of financing when we exchange or barter with them (we exchange products or services); for example, when we pay for advertising with our products, or when we provide our services to their workers in exchange for them to provide us with supplies or merchandise.
A tip regarding the search for financing sources is that before looking for external financing (especially that which involves the payment of interest), or a partner or investor (which implies that you have to share the profits of your business with someone ), is that you make sure you really need it.
To do this, you must calculate your investment well, and then make sure that there is no way you can reduce it (for example, renting machines, equipment or furniture instead of buying them), or that you can get your own capital (for example, selling some good personal).
Another tip is that you inform yourself well about the source of financing that you are going to resort to, and analyze well and put in writing all the agreements you make with it before using it, in order to avoid any problems that may arise later.
For example, if you are going to seek financing in a bank or financial institution, make sure that it is regulated by the corresponding government agency, analyze the loan conditions well, and read the contract well before signing it.
Probably wanna read: