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Small businesses, finance, collateral and other problems.
Setting up a business is in many cases is one of those leaps of faith only suitable for people with vision, entrepreneurs, that see opportunity where others just see plain risk. This is because there are so many obstacles. One has to study the market, hope the market analysis is sound and holds for long enough. Finance also needs to be arranged. Cash flow must be maintained. When one thinks about the constant flux and inherent instability of world economics, it is all enough to shatter the nerves of the most sanguine of jet fighters.
Finding finance is especially difficult when the business is new or has previously gone through difficult times and has a less than perfect credit score. In some cases the situation might seem hopeless and finding a suitable business loan impossible.
The good news is that in most circumstances this is a mistake. We live in a crazy, loan mad world where amazingly people will be happy to lend you money for the right price in nearly every circumstance. Of course if you have bad credit and not much of a collateral to fall on it will cost you more.
Lenders decide who to, and when to lend based on some very basic facts. How much can the borrower afford to pay back, and will the borrower want to pay back. Thirdly the lender will want to know what the borrower can hand over as collateral if the loan turns sour and cannot afford to make the payments.
This is where it can get difficult for new or small companies. You might have the best business idea since the invention of sliced bread but you can’t afford to get the idea on its feet. Not only that you have nothing which to put as collateral to secure the loan.
Financing alternatives.
This is where you need to get creative. If banks won’t finance you, who can? Well apart from the obvious, your rich grandma, your parents and good (and wealthy) friends, there is the option of equity financing and partnership.
These two options are, as you probably guessed, complex systems that include a great variety of sub-finance options. We can however divide them into two main subgroups. Equity finance and Venture Capitalists will give you capital (that’s money in our language) in exchange of a share in your profits and ownership of the business. Equity finance characterizes itself by not only providing capital but expertise and experience to your company. Of course the other way of looking at this contribution of expertise and guidance is a loss of control of your company.
A similar but more traditional way of raising cash is to find a partner or partners that will share in the funding and of course will share the profits also. The important thing to do in any of these options, but especially with partnerships, is to put in writing the details of the partnership to avoid future misunderstandings.
