How to Finance Your Business - Essay Example

To those who are thinking of starting or expanding a business, here’s a great way to do it. There are several options that depend on the needs of the business, the small type and the large type. The small type consists of Peer to Peer loans, Crowd Sourcing, and Microfinance. Big types of loans are equity financing that constitutes Venture Capital and Stock Market.
If you are a small entrepreneur who wants to start a business, you can start with Peer-to-peer lending (P2P). This is a debt financing that does not require banks or financial institutions. Based on my own observation, banks are hesitant to lend to start-up businesses because of a lack of expertise and start-up credibility. P2P is usually gathered from friends, relatives associates or partners in business; can be transacted through the internet, and due to the absence of collateral, a lot of trusts are required Because of the high risk involved, this kind of financing charges high interest that is a drawback to borrowers. (Investopedia).
Crowd-sourcing is becoming a popular source of funding for non-profit organizations like artists, musicians, charitable organizations, and even businesses, and has become possible through social media. People are persuaded to give a small donation like $5, $10, or more. Gathered together, this amount grows to a fantastic amount depending on the public’s response. Some examples are The “Ice-bucket Challenge” that even Pres. Obama was challenged to give a response; another is asking for donations in return for a reward. This scheme has become so trendy that the government has stepped in to regulate it. (Entrepreneur) The basics of crowdfunding)
Microfinance. A banking service is provided to poor entrepreneurs who have no chance to qualify for standard banking services. Microfinance gives opportunity to small business owners to borrow a small capital without collateral. A microfinance loan is usually not more than several hundred dollars, payable within six months to one year. The micro finance goal is to provide money to low-income groups to invest in small businesses to get them out of poverty. (Brooks, Chad. 2013). According to Chad (2013), citing World Bank records, there are 7,000 microfinancing companies that provide this service worldwide.
Venture capital (VC). VC is an equity financing that answers the financing needs of an entrepreneur who is not large enough to seek capital from the public market and banks. Cash investments are made in exchange for shares in the company and management participation. However, there are dissatisfying terms found in VC. In its participating role, conflicts arise when style of management is not compatible. VC expects higher returns in exchange for its higher risks, or may demand as high as 40% return on investment. VC monitors its financial exposure as it provides capital in different stages of operation that goes higher according to growth. VCs are not long term investors, so its exit should be properly evaluated (Chap. 15-7.)
Stock market .
Joining the stock market is another way to get financing. Stock market can help a company acquire capital and access finance for further growth and development. But this is not recommended for everybody as there are many things to consider as raising equity is expensive, demanding, and time consuming. Example is the legal and regulatory issues that have to be complied with.
From the foregoing, it is concluded that the choice of borrowers on the kind of debt structure will depend on the scale of business one is going to start. A peer to peer is the easiest form for a small and a starting one, and when the business is in need of expansion, venture capital is a sensible move, and a public traded company when its operation has grown big in size. Read More