Although the best way to start a business is funding it from our own pocket without any outside borrowing, most of us do not have enough funding to do so. Bank loans are the most widely preferred third party funding, but the most difficult part in a bank loan is that firstly, they ask for an asset over which the loan can be provided and secondly, they consume your profits in the form of interests. Moreover during the initial phases of your business venture repaying the capital becomes tough and thereby people end up paying interest for this delayed capital repayment too.
The best way to fund a business is to make use of a mixture of sources. Pull money from all sources that comes to your mind. From personal savings, pension funds and borrowings from close family members and friends. In this way we put up all the money we require from our own pocket although a major part of it is borrowed from relatives and friends. If we could at least pull out half of the liquid cash required for the initial capital, our chances of getting a bank loan for the rest of the money is bright. The banks expect your share in the venture and decide on their terms based on this factor in most cases.
The other major factor considered by banks to fund your venture is the business plan. A solid business plan with its nature of work and target environment accurately specified is the most essential part of a new venture. It is not only for the bank, the business plan provides you with necessary insights into that particular venture, that will discuss in detail the pros and cons of that venture being successful. A well defined business plan will make your work of obtaining a bank loan easier. The complete picture of the market, the size and potential of the competitions, promoters’ résumé, threats and challenges to the venture and the degree of change expected in these initial assessments are the details that are expected in a business plan along with the amount of money one wants to make out of the venture.
The bank or any third party lender will look into all these minute details and will analyze it thoroughly before deciding on the amount that can be lent for the venture. If the business plan is sound enough and the amount is reasonable, there will not be much of a problem. However if the lender feels some risk involved, he might ask you for a security or an asset over which the loan can be provided. The most preferred security, are sources from which the money can be recovered easily in case your venture screws up. Properties or a personal guarantee from any relatives or friends of you, are the most preferred way of security. The guarantor must have enough financial backbone to give you a security.
The lender will always try to maximize his profits and minimize his risks. It is advisable that you prepare a good business plan that minimizes the margin of an error.