Factors to consider while financing the business
Businesses today
exist in a new and different economic landscape that forces creativity and out
of box thinking and same is true while funding these businesses. Though there
are differ ways through which business can be funded but selecting a right
route for raising finance not only helps in reducing cost but also plays
crucial role in overall sustainability of the business.
There are
numerous ways to finance a business and ample lenders and investors to choose
from but choosing Whom, When and How play a very important role.
Financing can
come in the form of Debt and Equity and the terms of finance can vary
significantly between the two. Factors that are crucial while financing a
business include the Repayment terms, Total cost of capital and the requirement
of lender or Investor.
Repayment terms
are very important to decide on how financial arrangement is structured. Longer
tenure loans can aggregate a significant amount of interest over the time but
loans with shorter tenure requires larger periodic payments. While raising
funds consider the amount of periodic payment, how often the payments need to
be made and how cash flow from the business supports the same.
Total cost of
capital includes interest cost on loan, processing fees charged by lenders,
opportunity cost involved in case of collateral offered, professing fees
charged by professional agencies and other miscellaneous costs involved.
Consider all these costs while calculating IRR and choosing from available
options of funding.
Money from
Investors may not require repayment for many years but investor may expect to
be repaid at a steep premium all at once.
Understanding requirement of lenders or
Investors is very crucial while raising capital. Mismatch in delivery and
expectations can lead to complication between the business and lender or
investor and could lead to difficultly in raising further capital for the
business.
Finance is life
line of any business. Regardless of whichever path one takes, choosing the
optimum way of funding plays very crucial role during business life cycle.
Businesses which are able to manage it well can go a long way and create a
great value for its shareholders, lender and investors. Therefore, always find
a viable funding solution that allows one to focus on business sustainability
and profitability.
-Vivek Sakharkar
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