Business Financing

Business Financing Explained

Summary

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 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 is 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

Bank Loan

The first financing option that most business owners will look to is a bank loan. Lender approval will be based on the business’s 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

Lender requirements for a bank loan include:

  1. Personal and Business Background Check
  2. Business Plan
  3. Personal Credit Report
  4. Business Credit Report
  5. Income Tax Return
  6. Financial and bank statements
  7. Legal Documents

Terms and Conditions of a Bank Loan

Upon approval for a bank loan, the business agrees 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.

Lease Financing

Rather than businesses buying equipment, many will choose to lease the equipment. Equipment such as cars, computers, and machinery can be leased for a brief period or longer if needed.

  1. Leasing equipment for a brief period is known as an operating lease. At the end of the lease term, the equipment is returned to the financing company.
  2. Leasing equipment for an extended period is known as a 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 business’s tax burden.

Supplier Credit

Supplier credit is the easiest way for businesses to get financing. Suppliers (creditors) will offer businesses 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 it as well as extend 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 business’s 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 can factor their accounts receivable invoices, receiving up to 80% of the total from the factoring company. This is an advance on the company’s accounts receivable that will be repaid when the business’s client pays their invoice.

Lender Requirements for Factoring Business Debts

The only true requirement for factoring business debts is having high accounts receivable. Businesses with client invoices in the 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

SBA Loans are business loans that are backed by the small business administration. The SBA does not offer business loans but offers its promise that the borrowing business will repay the loan to the lender.

Benefits of SBA Loans

SBA loans are designed to help small businesses get the capital they need for a variety of financial needs regardless of the size of their business, their assets, or their credit status. SBA loans have similar terms and conditions to traditional business loans.

Government Grants

Government grants are free money to businesses. Government websites list grants available to businesses of diverse types and sizes. The business must meet the grant requirements and fulfill the terms of the grant to avoid having to repay the capital received.

Benefits to Government Grants

Government Grants are FREE money to businesses. This means that if the business follows the grant requirements, it will not need to repay the money. These grants are designed to help small businesses grow without having substantial amounts of debt as a result.

Stock Financing

Issuing stock has non-contractual, non-tax-deductible dividend payments. Businesses are selling a 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.

Bond Financing

When issuing bonds there are fixed interest rate contractual payments and a principal maturity. If the business cannot repay the bonds when they reach maturity the bond purchaser can be given company ownership shares in exchange. Interest paid on bonds is 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.

  1. High credit rating
  2. Business Plan
  3. Business financial history
  4. Income Tax Return
  5. Legal Documents
  6. Bank Statements
  7. Credit Report

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