Small scale business startup with capital acquisition goes hand in hand depending on the stage and nature of the business which can either be a new business or a continuing business. Capital requirement vary and is usually a main obstacle to entrepreneurs and business investors. Whichever source of funding you seek, remember there will always be pros and cons associated each option (Rainie, Anderson, & Page, 2017) .
Seeking Investors who will purchase equity in the business
Pros
First, one can get cash from money lending institution such as a bank so long as you comply to their terms and conditions of lending. This gives you financial freedom and capital to grow your enterprise. Second, you got an outside reinforcer who sees value in your business and willing to stand by you and ready assist you grow. Last but not least, you can take the network effects of the investors to connect with right business partners
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Cons
On the other hand, seeking investors comes with some demerits, in that, you will have to give equity away in your business/company. The equity does vary depending on startup stage. For example, if startup was just an idea expect to give more than for scenario where startup had traction and customers. Furthermore, if you get the wrong investor, your enterprise can end up being of more loss than gain to you. Investors are not just an ATM, they are also strategic partners (Zahra, 2015) .
Borrowing from family or friends
Pros
There as obvious benefits of borrowing money from someone you know compared to commercial lending institution. First, there are no or just low interest is involved. Someone you know can lend you money free of charge or at considerably less rates than a lending company. Additionally, it’s a lot easier. Unlike bank, no much information is needed. Your friend or cousin probably won’t run a credit check as they know you well.
Cons
However, borrowing from acquittances may not always be a smooth sail. At times you will face road bumps, like you may get limited on the amount of capital you need. For instance, when borrowing from uncle you can’t just ask too much money. Second, some people find it hard and awkward to borrow friends: they face difficulties and feel shy to express their financial struggles to their friends, others could be as a result of their personality problems such as ego and pride. Also, the method lacks clearly defined terms such as when to pay back, how often and other questions remain unclearly defined which may end up affecting the relationship of the parties involved.
Applying for a small-business loan from bank
Pros
Although loan bank lenders will scrutinize your business plan detailing the how the borrower is going to use the fund, they neither have say a say on how manage your fund, nor in how you operate your business. Second, lenders are entitled to what gain/profit. What is important to them is the debt repayment. Third, a business loan usually has low interest rate in comparison to many other funding options such as credit cards and finance companies though the repayment terms may vary from different commercial loans. The interest payments loan can be deductible on your taxes. Moreover, a small business loan can access to large sums of money depending on the actual requirement of the enterprise. The fund is available for immediate use, builds a credit rating basing on your timely payment and also creates a good financial reputation for your business from early stages.
Cons
Bank follow strict guidelines for the first-time borrowers. More information is required such as thorough knowledge of your business structure, general operation, potential investors, benefits relative to cost predictions and a lengthy review process. Interest rates are dependent upon government policy. Rates may fluctuate in the early stages while profits may not rise. Also, there is a risk of borrower losing a valuable asset as most commercial lenders will insist on one providing collateral in form of property such a house.
Borrowing against a home
The borrower provides home as a collateral. You are privileged of getting capital to start or expand your business. However, there is a risk of one losing the assets(house) in the event you aren’t able to repay.
Securing a second mortgage
Second mortgage refers to a loan that uses home as guarantee/security. Therefore, merits and demerits in this case applies as discussed from the previous point.
Using credit cards
Unlike commercial lending institutions, collateral is not needed: you get unsecured money without having to worry about equity or collateral. With credit card, an entrepreneur is in a position to control spending by setting spending limits where employees are involved. Furthermore, use of credit card made accounting easier as you can promptly get the details required to keep track of monthly and annual report expenses.
On the other hand, accepting credit card consequently have disadvantages. For example, every time interchange fee is cut which goes to the card issuer and payment network. This can be too expensive for a small business that deals with small items such as a donut shop. Moreover, when using credit card to purchase goods they are higher chances of impulse buying. Financial advisers always recommend that one pays cash because it registers in your mind as money spent (Marina, 2017) .
Conclusion
If one intends to do a serious business, borrowing from the commercial loan institutions such as Banks is a better option, as clear credit terms are defined such as how to repay, when to pay and the amount expected. Unlike acquittance borrowing, you can access large sums of money depending on the actual requirement of the enterprise. The fund is available for immediate use, builds a credit rating basing on your timely payment and also creates a good financial reputation for your business from early stages. Borrower will ensure good use of every single coin bearing in mind of the interest rates that are attached to the principal borrowed and also consequences of collateral. Moreover, this helps to avoid careless usage of money such as impulse buying like for the case of credit card funds. And not forgetting one has total freedom to manage and operate the business independently without involving the lenders, contrary to equity purchase by investors.
References
Marina, T. (2017). Finace Management. American Journal of Economics and Business Administration , 53-61.
Rainie, L., Anderson, J., & Page, D. (2017). code-dependent: Pros and cons of algorithm age. Pew Research Center, 8 , 86-93.
Zahra, S. A. (2015). "Corporate entrepreneurship as knowledge creation and conversion: The role of entrepreneurial hubs". Small Business Economics, 44(4) , 727-735.
