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Critical Considerations in Choosing the Right Source of Finance

At a particular stage in business, you will need some finance to boost the business activities or even expand your business so that it serves many clients. Additionally, many financial institutions can offer you the funds, but they have different terms. You need to carefully examine the terms before you opt for a particular source of finance and determine their implications for your business. Consider the benefits and the disadvantages of choosing a source of finance to establish its suitability for your business needs. Here are the key factors to consider when selecting a source of finance.

The extent of risk – A highly risky source of finance is not the best as it jeopardizes the future of your business. You need to understand the consequences of not paying the loan in time even before you obtain the loan. What are the available courses of action that the lending institution can take if you default to pay the loan? If it was a soft loan from a friend, it can spoil your relationship and even taint your reputation. For a financial institution, they will obtain a court order to sell the business assets to collect their money.

Cost – How much will you pay for getting money from a source of finance? Every business proprietor is rational and would want to minimize the costs so that he can operate profitably. It is desirable to find the least cost source of finance for your business. As you consider the interest rate, you must also think about the time required to repay the money. With numerous sources of funding available today, you can take time to compare the cost that they charge and choosing the most suitable for your business.

Amount of funding – How much money does your business require? The amount of borrowing will determine the source of finance that will fund it easily. In some cases, you might receive large sums of money from particular sources that have restrictions. For example, you cannot get a long-term loan from a bank overdraft.

Type of expenditure – How do you intend to spend the money? There are different types of expenditures in a business and they can influence the source of finance that you choose. For instance, capital expenditures are long-term and require long-term financing. If it is revenue expenditure, then you can get a short-term loan.

In most cases, entrepreneurs do not have the skills to make the best financial decisions. It is advisable that you seek the assistance of a financial expert. You can also engage a competent lawyer to guide on some legal requirements in the process.

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