Types of Financing

 

When looking for money, you must consider your company's debt-to-equity ratio - the relationship between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing. Here are some of the more common types of financing.

Debt Financing
Debt financing does not give the lender ownership control, but the principal must be repaid with interest. Length of the loan, interest rates, security and other terms depend on what the loan is being used for.

Commercial Bank Loans

A. Short-term: Loans for short periods (30 - 180 days) usually made to cover temporary or seasonal needs for inventory or personnel. These are common for established businesses, but may be hard for a new business to obtain.

B. Medium to long term: These loans may be repaid over anywhere from 1 to 5 to even 20 years depending on how the funds are used. The source of repayment is the cash flow of the business. Typical uses are for equipment, fixed assets, etc. Most loans to start a small business will be of this type.

C. Real estate financing: Real estate is typically financed over a fairly long term, 10 to 30 years. Expect a down payment of about 20%.

D. Accounts receivable financing: Money loaned against accounts receivable pledged as collateral.

Equity Financing

Equity is money put into a business by the owner, private investors, and/or venture capitalists. Equity gives an investor ownership and possibly some control of the business.

A. Your own savings: It is nearly impossible to start a business without using some of your personal funds. It is hard to convince someone to take a risk in your idea if you do not.

B. Friends, relatives, business associates, etc.: Most small businesses get started with this kind of help. They may provide some of the cash or may back a loan from a financial institution.

C. Venture capitalists: Groups invest in a new firm (usually high tech or innovative concepts) looking for an very high return on investment. Minimum investments are from several hundred thousand dollars to millions of dollars.

Internal Financing

A. Customers can be a source of temporary financing if they provide the raw materials or if they pay a cash deposit. This is not feasible in most businesses.

B. Trade Credit: Once you have obtained a good reputation with your suppliers you may be able to have credit for anywhere from 30 to 90 days. You may be able to order, receive and sell the goods before the bill is due.

C. Profit: Hopefully you will earn enough profit to be able to invest in and expand your business.

Leasing

Leasing is simply another form of financing. Leasing reduces the cash needed up front, but like a loan you are obligated to the payment for a certain period of time. Some lease contracts give you ownership of the leased item at the end of the term for a specified amount.

Types of Federal Government Financing

The following are some of the more popular types of SBA loan guaranty programs available to both start-up businesses and existing businesses:

• Basic 7 (a) Loan Guaranty: This is the SBA’s most flexible business loan program. The 7 (a) serves as the SBA’s primary business loan program to help qualified small businesses obtain financing. Loan proceeds can be used for most business purposes including working capital, machinery, equipment, furniture and fixtures. The typical borrower is an existing business.

• Microloan 7(m) Loan Program: This program provides short term loans for up to $35,000.00 to small businesses and not-for-profit child care centers for working capital or the purchase of inventory ,supplies, furniture, fixtures, equipment or machinery. Small businesses must applyu directly with to the SBA's local intermediary lenders: REDC for the City of Richmond and VCDLF for the surrounding counties.

• SBA Express: Participating banks use their documents and procedures to approve and service loans. This loan program makes it easier and faster for selected lenders to provide small business loans for $25,000.00 or less.

• 504 Loan Program: Provides long term fixed rate financing to small business to acquire real estate, machinery or equipment for expansion or modernization. The typical client is a business that requires brick and mortar financing. Usually for economic growth of a region or community project.