Pros and Cons of Financing a Business

August 23, 2014 | By | Reply More

Financing a business is often the biggest challenge for any entrepreneur. The business needs adequate support to develop products, reach its target market and repay its costs. Without money, the business will fail.

You can choose to use debt financing or equity financing strategies to get the startup capital your business needs. But which one is right for you?

Pros and Cons of Financing a Business

Here are the pros and cons of the most common types of financing a business:

Pros and Cons of Using Own Money

You can use your savings, remortgages or even proceeds from sale of your assets to finance your business. Here are the pros and cons of using your own money:

Advantages of Using Own Money

  • If you are using your own savings and money, you have far more control over your finances
  • External investors like to see that the founder believes in the business so much that he/she is willing to put his/her own money into the venture
  • No interest to pay
  • No restrictive repayment terms and no worries over repaying your own money
  • You keep control of your business, and you do not have to worry about transferring ownership stake in exchange for the investment

Disadvantages of Using Own Money

  • You may not have enough money to lead the business through its first few phases and your funds could run out before the business could stand on its own.
  • If the business fails, you could potentially lose a lot – all your savings, your house and other personal possessions.
  • There is significant emotional involvement that may potentially cloud your decision-making capabilities




Pros and Cons of Credit Cards

Credit cards are one of most common ways small business owners use to finance their business, especially for those with poorer chances of getting bank loans. Learn the pros and cons of using credit cards to finance a business:

Advantages of Credit Cards

  • No long application process
  • Business plan not required
  • Provides quick access to funds for purchases or cash withdrawal
  • Even if you don’t have a well-established credit history, it is easier to qualify for a revolving line of credit with a credit card
  • Easy to use and widely accepted as a form of payment
  • Offers protection against theft and defective merchandise
  • The ability to use the “float” allowing up to 45 days to pay depending on when you made your purchases
  • Purchasing online from vendors, contractors and suppliers is easy
  • Can help keep track of your expenses and simplify bookkeeping with monthly and annual statements, in addition to online tools
  • For some cards, you can get incentives and rewards such as airline travel miles, discounts, even cash back incentives.
  • Helps your business build credit
  • If paid back in full within the grace period, it can be an interest-free loan
  • Some suppliers provide discount if you use credit cards

Disadvantages of Credit Cards

  • If not paid in full, credit card is a more expensive source of funds compared to a bank loan especially if you are incurring late fees or penalties
  • Could negatively affect your personal credit history, affecting your ability to borrow money
  • There are security risks where the credit card information can be stolen or hacked
  • Potential for unauthorized use of the card when employees and/or partners use the card for personal purposes
  • Interest rates fluctuate and even credit limits change depending on how you use the card and manage your credit
  • Small business credit cards often carry less protection than personal credit cards.

Read the article Using Your Credit Card to Finance Your Business
 

Next: Pros and Cons of Borrowing from Family and Friends

 

George Rodriguez

George Rodriguez is a writer for PowerHomeBiz.com. An entrepreneur with experience in running several businesses, he writes on various topics on entrepreneurship and small business.

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Pros and Cons of Financing a Business
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Financing a business is often the biggest challenge for any entrepreneur. You can choose to use debt financing or equity financing strategies to get the startup capital your business needs. But which one is right for you? Here are the pros and cons of the most common types of financing a business.
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