Business Financing refers to the means by which a current or potential business owner obtains money to either start a new business, buy an already existing business, or increase capital to finance future or current business activity. The process of business financing is not as simple as most entrepreneurs and business owners would like you to believe. In fact, it can be downright complex. If you are planning on starting your own business, you should first research and analyze the financial aspects of the venture.
Primary business financing options
Business loan, equity loan, and debt consolidation are the three primary business financing options available today. Each offers different benefits and drawbacks and choosing the right one for your situation should be done with due diligence. Although all three may look like they would be easy to obtain, each requires varying amounts of money, repayment schedules, and interest rates. To better understand the differences among these three, we’ll break down the requirements of each using categories to explain how they work. With this information, you will be better able to choose between the three options to find the right one for you and your business.
Businesses Angels are trusted lenders that provide cash to businesses in exchange for shares of their company’s stock ownership. Businesses Angels make their money by receiving a cut of the companies’ stock after it goes public. Many banks and other reliable sources have relationships with Angel investors. These investors typically invest a large amount of money into companies that are not as successful as they are. Business Angels is able to give businesses access to the capital they need in order to grow and expand.
Business Loan and Equity
Both secured loans where businesses access loans from a lending institution to finance growth or existing operations. However, Business Loan interest rates typically range between fifteen and thirty percent lower than those for standard financing. Companies also have the option to obtain unsecured financing through private equity firms, private placement vehicles, or venture capital firms. The rates for Business Loans are higher because companies have to put up collateral against the loan to secure it.
It is a type of private funding available to businesses through investors. Venture capital firms pool money together from a number of investors who agree to invest in a particular business. Typically, venture capitalists will invest up to seventy percent of the capital value of the business. Because venture capitalists control a great deal of the money invested, they can potentially influence the management of a business to take positions that benefit them and their partners. However, venture capitalists should be avoided for personal investments as they can lead to excessive risk for businesses.
Debt Financing Options The most common form of debt financing for businesses is preferred or unsecured credit card debt. Credit cards are a common form of debt because they offer businesses an easy way to pay back outstanding bills by making monthly payments. Although the payments may not be enough to keep the company afloat, they allow businesses to pay off existing debts quickly by leveraging existing cash resources. Unfortunately, credit cards come with high-interest rates that make it difficult for small businesses to make regular monthly payments.
Receivables Funding Small businesses
Receivables Funding Small businesses that generate most of their income from customers typically require small business loans to obtain working capital. Small business owners may use a receivables financing option if they have customers who pay on time. In order to find out if a customer is likely to repay a debt, the lender will require the date on which the customer made its last payment. If the customer’s payment history is less than perfect, the lender may require the borrower to provide a letter stating why the customer will not be able to pay the debt back. These letters may be and can be good for business owners.
Common Equity Financing Options Many small businesses obtain small business financing by issuing equity. Equity financing allows small businesses to own a stake in a company without actually having all of the equity or purchasing the entire equity of the company. However, equity financing is not ideal for all situations. Small businesses that need more than the equity value of their business may need to consider a debt financing or merchant cash advance.
Private equity bond
A relatively new way of obtaining business financing is the concept of “PEB” or private equity bond. Private equity bond funding is most used to finance startups. That intend to their profits to initial public offerings (or IPOs). As with the general concept of business financing, startup entrepreneurs will often need to develop and manage a team of professionals in order to properly complete these types of transactions.
Private investors are also another source of capital for entrepreneurs looking to fund their businesses. An entrepreneur may approach a private investor to obtain a business loan in order to fund a project. That will have a low risk for the entrepreneur but will be highly lucrative to the private investor. The advantages to this type of funding include a lower interest rate and a longer repayment period. However, there are risks with the business loan as well, which the business owner must take into consideration. Before deciding whether to accept the terms offered by the private investor. This means that a good entrepreneur will always shop around for the best deal on a business loan.
Expedite cash flow
Finally, some entrepreneurs will apply for short-term financing in order to help expedite cash flow between projects. Typically, entrepreneurs may want to immediately take advantage of any available funding. In order to gain immediate momentum and meet projected goals. However, short-term financing may not be viable long-term options due to the high cost of such projects. Therefore, it should always be being a company financing solution. As with all business financing options like the best auto loan. Potential borrowers should take the time to research lenders thoroughly before signing on the dotted line.