In a bid to fulfill my God- given assignment, I had on different occasions talked with people with great business ideas, but lacking in the necessary funds to kick- start the business ideas.
Any viable business idea will need certain amount of finance, to put in place things needed not just for the take off of the business but also the smooth running of the business.
As an entrepreneur who is just starting out, you might not have the capacity to bank roll the take- off of your business idea. But as it has being said, “Where there is a will, there is a way.” There are avenues to raise such funds.
One truth the rich know, that has and is still making men rich today is what is called OPM- Other Peoples’ Money. This is one secret the rich have leveraged on to arrive in their places of affluence.
Basically there are two ways by which you can do this:
Debt Financing: The business owner borrows the needed money from the bank or other financial institution to kick-start the business and pays back over a period of time at a set rate of interest.
Corporations also sell debt in the form of bond. Companies that rely heavily on debt financing are described as highly leveraged. You can also borrow from friends and family to finance your business ideas. The advantage of this is that you might not necessary pay interest.
Equity Financing: The business owner gives up a certain percentage of ownership of his business for money. The equity investor receives a percentage of future profit from the business, based on the percentage of ownership purchased.
Corporations sell equity in the form of stock.
You cannot sell stock unless your business is incorporated, but you can sell equity.
Large companies are usually financed by both debt and equity.
Advantages of debt financing
The lender has no say in the future, direction and running of the business as long as the loan payments are made.
Loan payments are predictable and do not change with the fortune of the business.
Disadvantages of debt financing
If loan payments are not made, the lender can force the business into bankruptcy to get the loan back.
To settle a debt, the lender can take the home and possessions of the owner of a sole proprietorship or a partner in a partnership.
It often takes a long time for a new business to show a profit. The risk of debt is that failure to make loan payments can destroy the business before it gets the chance to prove itself.
Advantages of equity financing
If the business doesn’t make profit the investor does not get paid.
The equity investor has an interest in seeing the business succeed, and may, therefore, offer helpful advice and valuable contacts.
Disadvantages of equity financing
Through giving up ownership the entrepreneur or business owner may lose his control over his own business to the equity holders.
Equity financing is riskier for the investor, so the investor mostly wants both a say in how the company is run and a higher rate of return than a lender.
Now, you have to decide between debt financing and equity financing. The choice is yours!
To Your Prosperity
Sharon Akinoluwa