Business Financing Explained
In the world of finance there are many different options available to businesses of all sizes and types. The overall goal of business financing is to raise the capital to meet your business’s current needs. Those needs can range from equipment purchases to renovations, all of which will help your business to grow further in its industry. Next is to get this capital at the least cost for your business to ensure you will be able to meet the repayment obligation.
There are numerous options and variations available for business financing. You should consider whether your needs are short term or long term. In some situations a line of credit will work better than a loan and in other situations the opposite. The main thing it to really think short and long term regarding your needs. Below are a few options to consider for your business financing needs.
Top Business Financing Options
The first financing option that most business owners will look to is a bank loan. Lender approval will be based on the businesses credit history and rating, type of business, number of years in operation and assets. Most lenders require businesses to place an asset as security on a bank loan. If the business defaults on repayment the lender can seize the asset and sell it to cover the cost of the loan.
Lender requirements for a bank loan include:
- Personal and Business Background Check
- Business Plan
- Personal Credit Report
- Business Credit Report
- Income Tax Return
- Financial and bank statements
- Legal Documents
Terms and Conditions of a Bank Loan
Upon approval for a bank loan the business is agreeing to repay the capital borrowed along with any interest that accrues on the loan along with other fees that may apply. Assets placed as collateral on the loan will be seized and sold to cover the cost of the loan if the borrowing business fails to meet the repayment obligation.
Rather than businesses buying equipment many will choose to lease the equipment. Equipment such as cars, computers, and machinery can be leased for a short period of time or longer if needed.
- Leasing equipment for a short period of time is known as an operating lease. At the end of the lease term the equipment is returned to the financing company.
- Leasing equipment for a long period of time is known as an capital lease. This type of leasing is a way of funding a purchase. The company financing the equipment is looked at as having purchased the equipment outright.
Advantages to Lease Financing
Leasing equipment allows your company to keep cash flow for other financial needs. Leasing requires a much lower down payment than that of a loan or purchasing the equipment outright. Leasing equipment is also fully-deductible, lessening your businesses tax burden.
Supplier credit is the easiest way for businesses to get financing. Suppliers (creditors) will offer businesses with an average of one week to six months to pay for goods received from them. If the borrowing business needs a larger credit line the creditor will negotiate with as well as extending the repayment terms.
Why Choose Supplier Credit
Many businesses choose to use supplier credit because it is much easier than obtaining a loan and meets the businesses needs quickly. With a fair length of time to repay the supplier this makes for a cost effective financing option for your business.
Factor Business Debts
Businesses are able to factoring their accounts receivable invoices, receiving up to 80% of the total from the factoring company. This is an advance on the companies account receivables that will be repaid when the businesses client pays their invoice.
Lender Requirements for Factoring Business Debts
The only true requirement for factoring business debts is having high accounts receivables. Businesses with client invoices in collection, awaiting payment, are eligible to receive factoring of their business debts. This will get them the capital they need without waiting until clients make payment.
SBA Loans are business loans that are backed by the small business administration. The SBA does not themselves offer business loans but offers their promise that the borrowing business will repay the loan to the lender.
Benefits to SBA Loans
SBA loans are designed to help small businesses get the capital they need for a variety of financial needs regardless to the size of their business, their assets or credit status. SBA loans have similar terms and conditions to a traditional business loan.
Government grants are free money to businesses. Government websites list out grants available to businesses of different types and sizes. The business must meet the grant requirements and fulfill the terms to the grant to avoid having to repay the capital received.
Benefits to Government Grants
Government Grants are FREE money to businesses. This means that as long as the business follows the grant requirements they will not need to repay the money. These grants are designed to help small businesses grow without having large amounts of debt as a result.
Issuing stock has non-contractual, non tax deductible dividend payments. Businesses are selling portion of ownership of the business and its assets. Issuing stock is done to raise capital for the business. This is done at the expense of the business owners and shareholders.
Why Sell Stocks?
Selling stocks is a great way for businesses to gather the capital they need to meet financial needs and to grow larger. They are selling portions of their company that will add to the benefits of their business in the long run.
When issuing bonds there are fixed interest rate contractual payments and a principal maturity. If the business can not repay the bonds when the reach maturity the bond purchaser can be given company ownership shares in exchange. Interest paid on bonds are tax-deductible for the business. See Our Bond Financing Program Here
Benefits To Issuing Bonds
For those who issue bonds their business is able to get the capital they need for an extended amount of time without repayment until the bond matures. This gives them the money they need to meet their financial needs and grow financially before they need to make repayment.
- High credit rating
- Business Plan
- Business financial history
- Income Tax Return
- Legal Documents
- Bank Statements
- Credit Report