4 Main Factors to Consider When Choosing The Best Method to Finance Your Project
When starting a project one of the most important things to consider is where to get funding. There are numerous ways you can get funding to start your project in the right way. One of them is through lenders and investors. The funding can either be a debt or investment, and each one of them has different terms when acquiring them. In order to decide the best one for your specific business, you need to consider the following:
1 Repayment Terms
Know how long the specific financing plan you choose will last. If you get a huge loan, it might be more costly in the long run while in loans with shorter terms, you will have to pay a huge amount of money in each installment so that you can complete the payment before the stipulated time. Know how much you will pay for each installment and the exact amount for each one of them. You also need to consider the allocation of each payment to principal and interest. Choose a loan with a higher allocation to the principle so that the loan can be cheaper in the long run.
2. Interest and Fee Structures
Before deciding the best funding method, know the total cost for each one of them. Calculate the total cost including interest rates and broker fees. Sometimes investor loans might be cheaper than the others. That is because some payment options require you to pay a huge amount of money at once while others need to be paid over a long period of time. Other financing options can be complicated especially if the management changes, and they change the repayment plan.
3. Lender Financing Requirements
Compare the different requirements each lender places on you before getting the funding you need. Most of the lenders will look at your credit score and some financial ratio tests like debt to equity or interest cover ratio. You should only work with lenders that you can meet their requirements. Always ensure that you discuss the requirements of each lender in detail. If there are areas where they are not understandable, ask all the questions that will help you understand them better.
4. Additional Financing Requirements
When you choose a specific financing plan for your project, take time to decide whether it’s the best option before finally getting it. Know whether the financing plan has additional financing requirements. Some lenders might require you to have an ownership stake in the company, and they may want you to buy back the premium after a specified period of time. The process might be confusing when buying the ownership stake back as the investor might be the one making all the important decisions of the company.
Before choosing the best financing plan for your project, you need to consider the factors above. The factors will act as your guide in choosing the best financing plan that will help you realize your project goals. Before choosing any financial plan, always ensure that you know the repayment terms, interest rates, lender financing requirements, and any other additional financing requirements.