Hatching a business idea is one step into financial independence. Actualizing the concept into reality will need capital. Finding capital for a small business is convenient. However, most business people swear that they had everything figured out until all their accounts ran dry.
What are some of the financing options available for entrepreneurs? There are risks to borrowing capital from the wrong institutions. For instance, a shylock can confiscate your assets, causing you to dig your debt grave deeper. There are various reliable capital sources one can explore. One such option is factoring. Others include:
- Personal savings
- Equity financing
- Family and friends
- Bank credit
- Invoice factoring
You should start saving for your startup business before launching your brand. Your personal funds or equity can be savings generated over a long time or obtained from other personal endeavours. How much you save depends on your income and ability to save regularly.
The greatest advantage of funding your business is that the capital is interest-free and has no liability. However, it is critical to have a business plan so you can know the exact amount you need before you kick-start your business. The other way of financing your business is by borrowing friends and family.
Family and friends
You can talk to close family members and friends and ask them to fund your business. The beauty in approaching close friends and loved ones is that they can loan you the money without demanding quick repayment.
Credit from loaning facilities
Banks and other formal loaning facilities are the most reliable source of capital for business startups. However, you must have collateral against which the loan is awarded. Secondly, the interest rate can be unusually high. It would be best to buy a company asset instead of using the loaned amount for operational costs.
At times, bank credit can fail to suffice when you need money. You may consider selling your invoices to a third party at a discount and return for cash. Invoice factoring is also known as debt factoring, asset-based lending or invoice finance. You need to sign an agreement with a factoring company. The agreement allows the lender to manage your sales ledger and control credit for a specified period.
In return for signing the factoring agreement, you receive funds when your customers send an invoice. A factoring company can avail finances tied up in unpaid invoices. Therefore, your business can obtain funds without waiting for your clients to pay.
When to use invoice factoring
Invoice factoring is the best option when you have many invoices that affect your cash flow. Invoice factoring allows your business to survive when cash flow is low. You can use the funds received from invoice factoring to service a loan, pay for short-time expenses and take advantage of seasonal business opportunities.
Your shares can be a source of funding for your business. Equity financing allows you to raise capital by disposing of your shares in a company.
Funding your business from an informal source is advantageous. However, invoice factoring and equity financing is the best way out when friends, family and personal saving can’t carry the day.