Are you setting up a new business venture? Or are you planning to expand your current business? Either way, you are most likely to face some difficulties obtaining capital to finance your business, especially during these times of economic uncertainty.
Your possible sources of funding can either be internal or external. If you are a starting a business, you will most likely use internal funds such as personal savings to finance your company. But if you are already in the expansion stage, you should be tapping more external financing in the form of debt or equity.
When borrowing money or raising funds from investors, you need to consider the three important factors that could affect the viability of the financing package, namely time duration, interest rate, and the management participation of the funds provider.
Say that you are considering whether or not to accept a short-term loan being offered by your bank. If you plan to increase your working capital requirements for your inventory, accounts receivables, or operating expense budget, this short-term loan might be appropriate. This is because this type of financing typically requires repayment of the loan within the next 12 months, so you can pay it back using profits derived from the business during the year.
But if you are looking at financing capital expenditures, such as buying new machinery or opening new stores, you would need a loan that can be repaid over a longer period of time. This is because to pay back the loan, your business would need to accumulate enough profits for a number of years, which would normally be during the economic life of the assets you have purchased with the loan proceeds.