Business

How to determine which type of financing is right for your business

finance

Financing alternatives according to the stage of your business

Financing is perhaps one of the most essential aspects to start your business or to achieve its expansion. However, not all financing programs that exist are destined for the same project phase and selecting the wrong one can lead to unpayable debts or capital stagnation.
What stage is your business at? The answer to this question tells you what type of financing your small and medium business (SME) can access to operate. You can also use the small business loan calculator to evaluate the loan criteria.

The traditional life cycle of an SME is divided into four major stages and in each of them the need for capital is different:
⦁ Incubation
⦁ Takeoff
⦁ Developing
⦁ Maturation
However, you can sum up the objective of this capital in two great uses: money to start (initial capital) and money to function (working capital).

Incubation and takeoff

At this stage, you need initial capital. However, at this stage, when the business takes its first steps the financing source options are scarcer. In practice, there are two mainly:

Self-financing

In general, entrepreneurs who are just beginning are recommended to finance the first cycle of the business with their own resources for the most part. It could be through savings, loans from relatives or trusted friends, or after the sale of some good of a value.

⦁ It is the cheapest option of all the alternatives that a venture has. The initial stage is complex, and while you run the risk of losing capital, you still have time and room to recover.
⦁ If the company borrows to start and does not generate enough income to pay its commitments, the financial history of both the owner and the company suffers simultaneously. Also, recovering from a credit debt takes time.

State programs

The Government offers a wide variety of initial capital financing alternatives for ventures. Normally, the state financing lines do not require the return of the money. However, they make such a structure of the business with a long-term plan to meet certain financial and social milestones. This helps the entrepreneur to organize everything from the beginning.

This instrument is perfect for those ideas that are already advanced and have a clear business model. It is ideal to create prototypes. The creation of a prototype helps to better market the product or service you are already providing and to increase sales.

Research the entrepreneurship support programs of government agencies in your city, region. or country. You can also find advice in guilds or associations related to your industry. It usually works in close connection with local governments.

Development and maturation

At this stage, your SME must be 100% operational. So, you need working capital. Entrepreneurs focus on those small big details that arise when the operation is underway. The maturation captures the new customers that assist in paying salaries or investment for business growth. It is the stage that requires getting the money needed to finance operational expenses and future investments.

In general, SMEs need to prove constant sales after 6-12 months of operation. After all, they could access the financing alternatives that work best in this phase, such as:

Private mechanisms

⦁ Retained earnings (income): When the same company is financed through its cashier.
Increase in non-stock capital (socio-financial income): When withholding dividends agreed in the shareholders’ agreement or partners’ agreement.

Capital risk

This is a resource for more advanced companies. It is a considerable investment where the investor adds directly to the actions of the company. It is also useful for the expansion and growth of the company. In this modality, the risk and the returns that are fruits of the business are shared. It is generally viable for medium-sized companies that are ready to reach the next level.

Investor networks

This type of financing is obtained through networks of contacts, also known as angel investors, who are interested in your business by finding your innovative product or service. They are those people or institutions that come to you when they consider that your business has enormous potential. Generally, this type of investment commits to the actions of your business, so it is an agreement that you must evaluate carefully.

Capital seed

This capital is perfect for those already established businesses that have a certain product or service of great importance for the sector, but only require a boost to cover some need for operability, for example, to carry out market studies, to check the level of feasibility, to execute the business plan, and to launch.

Financing of banking and non-bank financial institutions

You can go for this type of credit or financing plan for expansion or have more money flow. Its functionality is mixed and represents a feasible idea in almost any phase of your business. However, it is not applicable in the beginning. It is important to ensure that your business needs finance. Also, you should consider avoiding unnecessary expenses.

Commercial credits and lines of credit. In Australia, only banks and credit unions are authorized by law to offer these financial products.
Advance accounts receivable through Factoring. Both banking and non-banking companies offer these services.

Leasing

Through this alternative, the SME leases a capital asset to a leasing company, which after a period becomes the property of the company. It is a financing format especially suitable for businesses that seek to expand. Besides, this works for those who do not have enough money to acquire the machinery or infrastructure necessary.

Crowdfunding (social financing) and other online financing networks

They are participatory financing mechanisms in which investors provide funds to project and company proposals, through digital platforms.
At last but not least, as your business consolidates and reaches a state of maturity, you can combine and assign relevance to each of these sources. We had listed above the sources of financing according to your need for funds. The credits are made to measure as a suit, you just have to choose the one that suits you best. Remember that to access financing for which you have a business plan and a clear projection of the profitability of your company. The suitable type of financing capital leverage the success of your business.

Conclusion

The doors to available financing alternatives will open or close to your SME depending on how advanced it is in its life cycle. In the stages of incubation and take off, it is difficult and costly more to access funds. That is why personal savings and public and private financing programs are so useful for the entrepreneur in this phase. Meanwhile, when the SME has already reached some consolidation or maturity, the available alternatives are more. However, business administrators must be very careful when accessing these funds, since not all options work for all SMEs equally.

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