A conservative approach to financing involves utilizing long-term funds to acquire temporary and permanent assets. This approach is less risky than an aggressive approach, as it uses current assets to meet immediate liabilities rather than providing a buffer for working capital requirements. Depending on the type of business, the conservative approach may not be appropriate. Listed below are some common financing strategies:
Note financing: A common financing strategy used by entrepreneurs and friends and family is note financing. The use of notes allows a company to continue operations until the anticipated influx of capital is received. However, note financing is risky as the repayment schedule is shorter than that of an equity investment. This strategy also attracts lower interest rates than equity. Financing strategies for small and medium-sized businesses vary, but should be considered when planning a business’ financing needs.
Debt financing: In a debt financing strategy, a business borrows money from a lending institution. The organization then repays the loan with interest. The debt financing strategy is another popular financing strategy. In this strategy, the organization borrows money from a lending institution and pays back the loan, as well as paying interest. As long as this is paid back within the stipulated time, the company can benefit. Generally, the best strategy is to utilize a combination of equity and debt financing.
Bank loans: In addition to low interest rates, banks also offer attractive terms. Depending on the type of business, banks may be able to provide a lump sum to start the business. Bank loans are usually reserved for established businesses with excellent credit records, so if your company is relatively new, it will be harder to qualify for a bank loan. However, it’s still worth pursuing if your business concept is a viable one.
Borrowing from family: When possible, borrowing from friends and relatives can offer better terms than a traditional loan. Close relatives may be willing to lend you money interest-free for a while. However, this is not a good option if your personal relationships are strained. Hence, it’s best to put these relationships in writing. This way, you can be certain that the terms of borrowing are mutually beneficial. The risk of destroying personal relationships is minimized.
Other financing strategies: Venture capital: Although not a traditional funding method, investments from friends and family can often be less risky and have more flexible terms than traditional financing. A newer form of VC funding, known as crowd-funding, offers a hybrid of equity and debt funding. With this form of funding, a startup agrees to share a portion of its future revenue with its investors in exchange for up-front capital. In return for the capital, the startup will have to pay the investor on monthly revenue. As long as the company meets certain criteria, it will guarantee a fixed return on the capital.