Starting a business is not a cakewalk and you must know your financial strengths and weaknesses very well before commencing the business. While finalizing an appropriate source of finance, it is necessary that you should analyse investment power and risk associated with it. Many businesses result into failure mainly in leverage because of their excessive exposure to finance as compared to investment capacity.
It is crucial that you systematically assess investment opportunities linked to your business before finalizing your resources. Calculate expected return on investment for each source of finance and work out payback period for investment. An investment having better expected returns and less payback period is more preferable. If you are buying equity stake in the company, you must know the type of shares you are purchasing and if there are any other share options or warrants attached. If you are procuring debt, it is very necessary to know whether it is convertible or subordinated.
It is essential to know at what year or time your business is expected to achieve break even time, so that you can formulate financial strategy according to that duration. You should always work out the opportunity loss on your investment and also assess the probability of failure. With the risks of the business investment it is also necessary to evaluate the key people behind investment. Make sure that it will be legally possible to invest additional finance in future for your business. Always remember to secure your potential investments by assets. Confirm that your business is up to date with all its tax responsibilities and all business assets are fully insured.
It is never advisable to choose financial source which is not sound in facts and figures. The investment needs of your business will differ according to the type, size and sector of the business. The risk and return always go hand in hand in business and it is always advisable to take risk in the extent of your capacity.
Following above guidelines will not only make you earn positive return on investments but it will also offer you fighting chance to turn your company into enormous profit. Your financial capacity and risk taking ability directly impacts your business plan. So you should examine your investment competence and take risk according to your business priorities and financial goals.