Choose your best financing option
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Different sources of money have different conditions attached. Some
financiers require an involvement in the business; others take months even
years to arrange funding. Some are costly but involve the recipient in little
risk, while others are inexpensive, quick to arrange, yet impose comprehensive
personal liability. Choosing which financing option to use is a matter of personal
preference, once the appropriate strategic balance between debt and equity has
been struck. One of your tasks in managing the firm's financial affairs is to
keep good lines of communication with as many of these sources as possible.
What are the
options?Costs: Raising new share capital is
expensive. Between 10% and 15% of the first £500,00 you raise will go in set up costs. An overdraft
or factoring agreement is cheap to set up, usually a couple of per cent. Loans,
leasing and hire purchase agreements involve modest costs, while overdrafts
cost less still.Control: Selling shares inevitably involves some
loss of control. Letting say 5% go may just be a mild irritation from time to
time, while 25% could give others a fair amount of say in how things are run.
While you have over 51% you are in control, if only just. Speed: If time is important then an overdraft
will be your best financing option. It can be arranged in days. Bank loans,
leasing or factoring can take anything from a few weeks to a month or so to
arrange. Raising venture capital will take between six months and a year.
Management time: Raising venture capital
involves a considerable amount of management time. Plans have to be written and
presentations made to several venture capital firms. Most other sources of
finance are much less time consuming to arrange. Flexibility: As your plans change, the amount of
money you actually need may alter. With leasing, hire purchase agreements and
long term loans and share capital the amount is agreed at the outset. For
overdrafts it is possible to draw down only what's needed at any one time, with
the upper limit negotiated usually each year. Added value: With some sources of finance you
can get useful expertise as well as money. For example, with factoring you
could get expertise in managing credit that could result in fewer bad
debts. Security and certainty: For most sources of
money, once you have agreed terms and comply with them, the funds are yours.
Overdrafts are technically, and often actually, repayable on demand. Personal liability: Providers of long-term loans
and overdraft facilities will look to the directors to provide additional
security if the business assets are inadequate. Raising share capital does not
usually expose you to any personal liability if things go wrong.
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