Sources of Finance and Their Advantages & Disadvantages
by Rob Jennings J.D.
Whether you're funding a new business or trying to expand an old one, choosing the right source of financing for your unique situation can be challenging. While you can ideally choose from several options, each source of financing comes with its own set of advantages and drawbacks. No one option is better than the others in all cases.
Personal Savings And Assets
Your personal savings and other assets make a great source of capital. Because you already have them, acquisition costs are minimal, and you won't be paying interest on a bank loan or sharing returns with investors. The drawbacks, of course, are that if you plow your personal savings into a business venture, you could lose it all. Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good for you, especially if you're approaching retirement age and are running out of time to rebuild depleted accounts.
Investors
Corraling a group of investors can help you raise startup or expansion capital for your business without placing all of the risk of loss on you alone. These investors may be active partners in the business, or they may be silent investors who simply provide capital and wait for their returns. The disadvantage to bringing in investors is that you do give up a certain element of control over the company. Even if you retain a majority interest, you'll need to keep your investors happy. Additionally, if you share the risk with others, you'll also have to share the profits.
Bank Loans
Private banks can be another good source of funding. For small ventures, you may be able to secure a personal loan or line of credit; for larger operations, you may have to leverage assets -- real estate, large equipment or inventory -- by using them as collateral to secure the loan. The advantage to borrowing the money is that it enables you to keep your cash on hand to use as operating capital or for personal survival during a down period in your business. Additionally, if business goes bad, you may be able to protect your most important personal assets by declaring bankruptcy. The disadvantages are that you'll have to pay interest on the loan. Furthermore, your payments will be due on time regardless of whether business is bad or good.
Government Grants And Loans
The U.S. Small Business Administration offers several loan and grant programs to help startup companies and assist existing ventures in expansion; your home state may have similar programs on a smaller scale. Grants are basically free money, and government-guaranteed loans come with interest rates that are typically far below what you can get on your own. Unfortunately, they come with a lot of red tape and may not be available for every type of business. Budget issues from year to year may affect the availability of funds. Finally, a government-guaranteed loan is still a loan; you'll have to pay it back regardless of whether business is good.
About the Author
A practicing attorney since 2003, Rob Jennings has written fiction and nonfiction since 2005, with his work appearing in a variety of print and online publications. He earned his Juris Doctor from the University of North Carolina at Chapel Hill.
Photo Credits
- Thinkstock/Comstock/Getty Images
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