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Critical Considerations in Choosing the Right Source of Finance

At a particular stage in business, you will need some finance to boost the business activities or even expand your business so that it serves many clients. Making a decision on the best source of finance for your business is tricky and you need to think about it soberly. You must note that each source of finance has different requirements and they have different impacts on the business in the long term. In making your decision, you should not only look at the advantages of the source of finance but also the disadvantages that might accrue. Here are the key factors to consider when selecting a source of finance.

The extent of risk – A highly risky source of finance is not the best as it jeopardizes the future of your business. You need to understand the consequences of not paying the loan in time even before you obtain the loan. There are several uncertainties involved in business, and sometimes, you might not pay the loan in time, and you must think of the possible scenarios that can occur in case this happens. For instance, if you acquired the money from close friends or family members, failure to pay back the money can spoil the relationship. Established financial institutions might liquidate the business asset to recover the loans.

Finance cost – What does it cost to obtain funding from a particular source of finance? All businesses aim at reducing their costs so that they can maximize the profits and this should be in your mind as you choose a source of finance. An expensive source of finance would not be beneficial as the company will pay lots of money in return. Some sources of funding have hidden costs which you only realize after acquiring the loan and therefore, you need to examine the conditions of the finance to ensure such costs do not exist. You can compare the costs of various sources of finance and also consider the repayment period so that you are not frustrated to pay the loan within a short time that is not reasonable.

Amount of funding – How much money does your business require? Suppose you want to carry a capital investment that is capital intensive, you will get the money from a long-term source of finance. In some cases, you might receive large sums of money from particular sources that have restrictions. On the other hand, sources of finance are not also suitable for raising small amounts of money.

Use of the finance – How do plan to use the money? Do you want to cater for a miscellaneous business expense or you want to invest the money? The purpose of the finance plays a significant role in selecting the source where you will get it. Likewise, revenue expenditures require short-term financing.

Deciding on the best source of finance can be complicated. You can hire a financial expert to help you make relevant decisions. Further, an attorney would help you to interpret various terms and conditions stipulated in the documents.

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