subject: Sources Of Financing For Small Businesses [print this page] In today's world, where businesses are struggling day and night to survive, arranging finance to run the business is becoming very difficult. Even if you have somehow financed the business, are you sure that you have financed it from the source beneficial for you..! This article will be discussing the factors to be considered when looking for the suitable source of finance; plus, how that finance can be beneficially employed for the purpose of business.
Cost of Finance:
Cost of finance refers to the cost of arranging finance plus the committed % which the businessman will be required to pay in anyway. When looking for arranging finance, it is very important to assess the cost of finance. When you ask bank to help you get loan, bank will be charging you a certain percentage as interest. That interest will be a cost for your business as finance cost.
Businesses are allowed to deduct interest amount from business profit; therefore, a businessman will be able to save tax on it. When it comes to equity finance cost, get ready to pay the highest percentage. Equity finance is one of the most expensive sources of finance. However, it gives you the option to not commit to any fix interest payment annually. Therefore, you will be able to work with money without the tension of repayment of the amount arranged from equity finance.
Security and Covenants:
Here, security means what assets you will be able to put on pledge if you ask bank to finance your business. If you ask banks to finance your needs, it will ask you to pledge something having real worth, so businesses usually put their business asset on pledge. Covenant means the loan provider may incorporate the provision in the contract that you will not pay profits to equity holders until and unless you do not pay interest committed out of those profits. So, now you have to think if you can affirm such provisions and honor them.
Duration:
Like a general rule, long-term needs are supposed to be financed with long-term borrowings and short-term needs with short term borrowings. However, where you think that you are expecting many short-term opportunities, you can go for long term borrowing; in short, the general rule can be flexed.
Maturity:
If you already have some amount as a loan in your business balance sheet and now planning to do more borrowings, you will have to consider the timing of maturity of existing loan. Not only this, but you will also have to think that how you are going to repay that existing loan. Either you can refinance the repayment of that loan or any other option available.
The list of factors to be considered is not exhaustive. It depends on in what situation your small business is struggling, or what kind of difficulties it is facing, or for what purpose you need money and so on. Always be attentive and stay ready to face the new potential problems in order to enable your business to fight with it
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