How important is money for a small business? For many people to enter into the business world, money is regarded as one of the biggest considerations. For instance, one might be an incredible writer but they need money to get their book published and distributed all across the world. Similarly, one might be a great chef but they need money to set up a restaurant, building a kitchen, buying food supplies, cutlery and so on. In all, we can say that money is crucial to keep a business up and running.
What is capital funding?
Capital funding is a term used for money that is provided by lenders and equity holders to a business catering to its daily and long-term requirements. For instance, to buy goods, manage inventories, transportation, equipment, web designing services, and salaries of the employees. Once a business starts getting profits, it may use the capital from its revenue to run the business. But generally, startups require some amount of capital funding.
Why is capital funding required in a small business?
- Entering the business world: As we discussed in the introductory part of this article, money is needed to enter the business world. You need money to set up your office, buy supplies, equipment and all other resources that will keep your business up and running.
- Researching the market: Any business is unsuccessful without market research. You need to check the latest market trends, competitor analysis, buying trends and customer requirements before you launch your product. The amount of research may vary depending upon your niche yet you will require some money to conduct the research.
- Developing your business: Running a business is an iterative job. You need money to keep your business running even after the launch of your product. You need money to pay the salaries of your employees, work on a new project, run your office and so on.
- Promoting your business: Even if you are opening a small cloth store in an area, you need to create an online presence of yours to attract customers. Many companies invest in their marketing and promotions from day one which is why can attract many customers even before starting.
These are just the basic yet major requirements where you will be spending all your money. Now let us discuss how one can raise capital funding for their business and achieve their goals.
How capital funding is achieved?
Most small businesses use two ways to raise capital funding: debt or equity finance.
Debt financing: As the name suggests, this kind of financing is done by taking loans. There can be different categories of loans such as short-term loans, long-term loans, with different rates of interests. In this type of financing, you must be sure that you will be able to make a monthly instalment towards the loan including the interest being charged otherwise you may lose your business.
Advantages of debt financing:
- Ownership of the business: You would not lose your control over the business even if you take a loan. The lender will be only interested in your bank statements and profits.
- Reduction in taxes: Loan interest can help you in reducing taxes while this is not the care in equity financing.
- Easy management: You understand how much interest you need to pay in your loan instalments, so you can plan and manage your capital accordingly.
Disadvantages of debt financing:
- High risk of bankruptcy: If anyhow you are unable to repay the loan, you might have to declare bankruptcy.
- Credit requirements: You must have a suitable credit score then only you will be able to get the loan.
- Fixed instalments: If you are running a business that has no fixed capital flow, or if your cash flow suddenly declines then it might become difficult for you to repay your loan.
Equity financing: In this category of raising capital for your small business, the business owner gives a part of their business to someone in return for capital. This means you need to find people who are willing to invest in your business. Then, the investors usually get their money back by dividends or either by selling the stocks of your company.
Advantages of equity financing:
- Low risk of bankruptcy: Unlike equity financing, you are not required to make payments from the beginning. Equity financing prevents cash flow from the company in the initial months.
- Easy to manage credit issues: If you have issues with your credit score, then equity financing is the best option for you. Moreover, sometimes the interest rates are too high in debt financing which makes it impossible for a small business owner to take loans.
- Higher chances of growth: Since equity financing does not require any cash flow out of the company, the business would likely grow faster.
Disadvantages of equity financing:
- Ownership of the business: One of the main drawbacks of this type of finding is that you will not be the sole owner of the business and hence you might lose some control over your company.
- Chances of conflicts are high: Since you have to consult with other people as well in making decisions for the company chances are that all partners might never agree to the same things. So you need a plan to handle conflicts professionally.
- Profit-sharing: You must be willing to share the profits of the company with your equity partners. This could sometimes cost you more than repaying a loan.
Debt vs Equity: What should you choose for your small business?
Now that you know why you need capital funding, what capital funding is and what are its types. You need to decide which method of capital funding will be good for your business. Both debt and equity have their advantages and disadvantages that you must consider carefully. A finance assignment help expert, Hazel, always tells her students that if one wants to decide which capital funding to choose for their small business, they should consider answering the following questions:
- How fast do you require the funds?
- How are you planning to repay the funding?
- Do you qualify for the type of funding you require?
- Can you afford a shared control over your company?
Do complete research on both the capital funding options for your small business. Read the advantages and disadvantages of debt and equity funding carefully. Then, answer these questions. We are sure you will be able to make the right choice. It could be easier to get a loan, and at the same time, you will be able to keep control over your business. But, the interest rates could be high.
On the other hand, if you consult investors, they would require a share in controlling the company. Moreover, they may demand high interest because they are putting all their money on your business and are taking a huge risk. No matter what you chose, capital funding is a must for a small business. You cannot skip this and become successful.
Author’s bio –
Emma Jackson is specialist in content writing, blogging and exploring new topics. Emma is also a part contributor of GoAssignmentHelp that provides assignment writing service. She loves to write topics like marketing, education and assignment services.