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 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.

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 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

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 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.

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 short period of time or longer if needed.

  1. 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.
  2. 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

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

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

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.

Stock

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.

Bonds

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.

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.

Merchant Cash Advance

Businesses with a minimum of $5,000 in monthly credit card sales are able to receive a loan up to $250,000 with a merchant cash advance. Repayment of the loan is made out of the business’s monthly credit card sales until the loan is repaid in full. Merchant cash advance lenders only focus loan approval on the company’s monthly credit card sale history.

Benefits to Merchant Cash Advances

  1. No credit checks
  2. No collateral requirements
  3. Available to nearly all businesses

Merchant cash advances are offered to businesses who have a minimum of $5,000 in monthly sales. There are no other requirements to receive financing approval. Businesses can get up to 100% of their annual credit card sales.

Secured Working Capital Loan

A secured working capital loan involves the business putting its assets as collateral in order to obtain working capital. The business is basically exchanging its assets for cash. If the business defaults on the loan the lender can seize the assets and sell them to cover the cost of the loan.

Why Choose Secured Working Capital Loans?

Secured working capital loans are easier to obtain than an unsecured loan because the business has assets to place as collateral. This can get the business a lower interest rate and more flexible repayment schedule.

Unsecured Working Capital Loans

Unsecured working capital loans require no assets to obtain the loan. However the borrowing business must have a high credit rating and profile to receive approval.

Lender Requirements for Unsecured Working Capital Loans

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

Start Up Loans

Start up loans provide new businesses with the capital they need to meet start up costs in purchases of equipment, inventory, obtaining a location and working capital to meet payroll and other business expenses.

Why Choose a Start Up Loan?

Start Up Loans allow businesses to meet the financial needs when just starting. Obtaining a bank loan at this stage in a business is nearly impossible because there is no guarantee the business will succeed. Start up loan approval is based off the business owner’s personal credit, history and assets.

Short-term Loans

Short-term loans are used to meet current business financial needs such as accounts payable. Typically short-term loans require less collateral assets and have low interest rates because of the short repayment term.

Terms and Conditions To Short-term Loans

The terms and conditions to a short term loan allows the borrowing business to receive the capital that they need without high interest rates. The repayment term is kept short, making for monthly payments that are high.

Long-term Loans

Long-term loans are typically used for big purchases and expenses within the business. The business has a loan term of 6 plus years which stretches out the businesses monthly payments making for lower monthly payments. Long-term business loans tend to hold high interest rates.

Uses for Long-term Loans

  1. business expansions
  2. improvement
  3. remodel
  4. purchases:
    1. facilities
    2.  industrial plants
    3. major equipment
    4. real estate

Revolving Check Credit

Revolving check credit is offered by banks only. The business is provided a specific amount of capital as credit to be used for various business costs. The business simply writes a special check that is repaid over 3 installments. Financing charges are based off the amount of credit used each month.

Benefits to Revolving Check Credit

Businesses are able to get the capital they need on a line of credit by simply writing a special check. Lenders allow businesses a fair length of time to repay the debt within 3 installments, averaging 3 months. Interest and fees are low and based off the amount of credit used only.

Professional Loans

Professional loans are provided to CPA’s, Dentists, Doctors, and Lawyers only. This capital can be used for a variety of financial expenses within their office.

Why Choose a Professional Loan?

CPA’s, Dentists, Doctors, and Lawyers choose to take out professional loans because they offer them lower interest rates and more flexible terms and conditions. The capital received does not need to have a direct purpose and can be used for nearly any expense within the office.

Micro-Loans

Micro-Loans are approved by the Small Business Administration (SBA) to either not-for-profit or non-profit organizations. They are intended for equipment purchases, working capital and other business expenses. Micro-loans are not to be used to pay existing business debts.

Terms and Conditions to Micro-Loans

Micro-loans typically average $13,000 but can go up to $35,000, depending on the borrowing businesses needs.  They are issued for an average term of 6 years. Interest rates a low and monthly payment are kept affordable for the borrowing business.

Franchise Loans

Franchise loans are designed for the purchase of a franchise business only. They can be used to meet all start up costs of the business. Franchise loans easily obtained by those looking to start a national franchise business.

How To Get a Franchise Loan?

Franchise loans can be obtained from a local lending institution or from the franchise company itself. Many franchise companies offers their own financing to inspiring entrepreneurs looking to invest into a franchise business.

Debt Financing

Debt financing is provided by banks and other traditional lenders. The loan receive is typically limited to the businesses assets. The capital received is used to pay off debts.

Why Choose Debt Financing?

Debt financing is a great way to consolidate a business’s debts into one low monthly payment. Debts in collections will be taken out of default and the business owner will be able to mend their credit and open up new financing options for themselves where needed.

Business Acquisition Loans

A business acquisition loan is used to purchase an established or existing business. Borrowing business owners are able to receive up to 90% of the cost of the business they wish to purchase. This is a great option for existing businesses to buy out other businesses or an new entrepreneur to get started. Lenders are more willing to offer a business acquisition loan because they have a thriving business that they are financing, it is looked at as low risk.

Lender Requirements For A Business Acquisition Loan

For existing business owners or new entrepreneurs to purchase an existing or established business they must present the businesses financial history, business plan and legal documentation. The purchasers credit, financials and assets will too be taken into consideration for loan approval.

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