Ways to Finance Your Dream Business: Different Capital Mix to Start Your Business3 min read
If you have a business idea, or you think your true calling is to walk an entrepreneurial path, but you are more than broke to start your own business, the only way to make that dream come true is to loan a capital to finance your dream business. Yes, you may have different sources to ask for a business loan. But all are different. Some may not even allow you to loan.
Here, we list down some sources you may ask a loan from and their qualifications so you can trim down your prospect.
Equity means ownership. Hence, those who have built their businesses are the ones only allowed in this form of loan. If you opt for equity investment, you should be ready to let part of your start up go. Because, once you sell 51 percent of your shares, you lose control of the company. This kind of loan is the same putting a ‘business for sale’ sign on your business.
However, if you’re the kind of owner who likes full command on your business, you may just take a loan from other companies in your business-if you happen to have one. Or loan from your friends, business partners, stockholders or other people you trust and create an agreement with them instead. That would be legal as long as you have mutual agreement with these people. Also, before you indulge in this kind of loan, be sure to know the law to protect yourself.
Personal Savings is the most common form of equity investment. This means that the fund that you’ll likely get to start your business is through personal savings, inheritance, friends and family. This kind of investment is what most of the people resort to when starting their own business. And it is actually a good thing for investors and money lenders as it signifies that you’re highly committed to the business because you’re willing to risk your personal savings.
In the course of your business, it is advisable to keep your personal investment to at least 25% to increase an equity position and leverage. Remember, the more equity your business has, the more attractive your business is to banks that can loan you as much as three times your business’ equity.
This accounts for the second most used form of business owners to finance their companies. According to Business Week, small business loans are declined by 18 percent due to financial crisis. Although this doesn’t mean that your loan would be disapproved because commercial loans are case to case basis. And the only way for your loan to be approved is to abide to the 4 C’s of Lending. Here they are:
Cash Flow: It is the amount of money going around your business or your liquid assets. When applying for a loan, you need to strengthen your cash flow as this signals that you’re able to repay the cash you’re borrowing.
Collateral: It is the value of asset you’re willing to pledge as security for repayment of your loan. This is to assure the lender of your commitment to pay because if nay, the collateral will be forfeited in the event of a default.
Commitment: This is the amount of money that you’re committing to your business. However, this is not as important as the other two aforementioned as your loan can still be approved without disclosing your share.
Character: This covers your personal credit score and history with the financial institution as a whole. This is the very thing that you need to look at if you’re planning to loan. All your debts no matter how small it is should be cleared and you should maintain a good credit rating to increase your chances significantly.
Indeed, there are different institutions to which you can apply for a loan. It all depends on how creative you are on designing your capital mix to get started with your dream business.