Financing your business
While many businesses have been established with little or no money, you may need funds to get you started. The financing decisions you make can be critical to the operation of business. You need to protect yourself against cash flow shortages. If you take on debt, you should be able to manage it comfortably. Like personal finances, managing business finances is all about finding the right balance, so it’s important to get it right. The following table shows the principal ways of financing a business.
|
Financing option
|
Pros
|
Cons
|
|
Own money.
|
|
|
|
Equity financing – investors give you money in exchange for a share in your business.
|
|
|
|
Debt financing – borrowing money that must be repaid with interest.
The main forms are:
-
working capital line of credit – sources include bank overdrafts, bill facilities and credit cards
-
term loans
-
financing of vehicles and equipment – includes leasing and hire purchase
-
trade finance – financing the buying and selling of goods domestically and overseas.
|
-
You are not committing large sums of your own money upfront.
-
Unlike equity finance, the lender doesn’t gain an ownership in your business.
-
The financing cost is a business expense, and the interest on the loan is usually tax deductible.
|
-
Need to repay the loan and the interest it incurs.
-
The bank may request a downpayment.
-
You may be required to pledge other assets you own which could be sold by the bank in the event you can’t meet the repayments.
-
If the loan is at a variable interest rate, interest rates could rise, increasing your repayments.
|
For more detailed information see the Commonwealth Bank web site’s Raising Finance page, which also features links to various product options.
Learn more about financial models for sole traders.
|
