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Author: Ravi Philemon
Whether you are just starting out or looking to expand, financing is an essential part of any small business, and proper financing can mean the difference between success and failure.
By: Hitesh Khan/
According to a recent research, start-ups and growing businesses receive most of their funding from informal sources–this includes money that comes from family, friends, and other private parties.
To have proper financing you must know how to successfully borrow money from people you know. And it is important that you overcome:
- Financial Risk: You must demonstrate to people who might be potential lenders that your business has a reasonable chance of success, and that their investment in it is a smart one. Lenders will want to see that you have the necessary skills, have thought about the risks involved and have a plan in place to minimize these risks while growing your business.
- Emotional Risk: You must convince people who might be potential lenders that investing in your business will not jeopardize their relationship with you. The information, worksheets, and examples contained in this document will help you to overcome this barrier, and bring you closer to getting the money you need.
When it comes to borrowing money from people you know, you should understand that small business owners will be at different points in the proper financing process – some of them may be uncertain as to where or how to begin, while others may already have specific lenders in mind.
While family and friends can be an excellent potential source of proper financing for your business, as a borrower you may still have some concerns about mixing money with people you know.
You are not alone in having such concerns. these are some of the top concerns of small business borrowers when they consider proper financing options:
- Borrower concern: “I am worried lenders will meddle in how I run my business.”
How to minimize this concern: By formalizing the loan through proper documentation you will make it clear that this is indeed a loan, and not a favour, which means your lender’s role does not extend beyond just that – a lender.
- Borrower concern: “I’m concerned that my lender will scrutinise everything I do financially that isn’t related to the business. For example, if I take a vacation will they wonder if I’m doing it with their money?”
How to minimize this concern: By setting up a mutally agreed upon repayment plan, your lender will know that you are serious about paying back the loan. Because they will be receiving steady payments, any concerns they might have about how you are spending money should be alleviated.
- Borrower concern: “Won’t my lender worry about my business failing?”
How to minimize this concern: Yes, that is a risk they’re made aware of. However, if you secure your loan with collateral, your lender’s risk is significantly reduced. In the event that you default on the loan, your lender will be entitled to receive something (e.g., a vehicle, office equipment, etc.) in lieu of being repaid.
- Borrower concern: “Even after I pay my lender back, are they going to feel as though they did me a favor, and that I still owe them something?”
How to minimize this concern: By talking to your lender up front and formalising the loan process, you make it clear that this is a business opportunity, not a favor. By making sure they know that all you owe them is the amount of money borrowed plus interest, you will prevent them from holding the loan over your head in the future.
- Borrower concern: “What if I have trouble paying back the loan?
How to minimize this concern: Generally, when you borrow from friends and family, you have more flexibility (compared with a commercial lender) in how you pay back the loan. If you are having difficulty making payments, be upfront with your lender about your situation, then suggest an alternative repayment plan that works for both of you. In most cases, your lender will appreciate your proactive response and accommodate your request.
Before you approach someone you know for money, you should first understand the typical loan approval thought process of a traditional lender, such as a bank. This is important for two reasons:
- The person you approach for money may follow a similar thought process, and you will need to provide the necessary information just like you would to a traditional lender.
- Even if the person you approach doesn’t follow this thought process, by providing some or all of this information you are demonstrating your business knowledge and professionalism, both of which can increase your chances of obtaining the money you need.
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