Most businesses need financing. Unless you’ve won the lottery or inherited a fortune, most people start a business with their own funds or with a combination of their funds and financing. Even an established business needs financing at one time or another.
Cash flow is different from earnings, and earnings do not guarantee money in the bank. Entrepreneurs need financing for inventory, payroll, expansion, new product development and marketing, to enter new markets, marketing or moving to a new location.
Defining and selecting the right financing for your business can be a complicated and daunting task. Making the wrong deal can lead to a host of problems. Understand that the path to obtaining financing is not clear or predictable. The financing strategy must be driven by corporate and personal objectives, by financial needs and, ultimately, by the alternatives available. However, it is the entrepreneur’s relative bargaining power with investors and the skills to manage and orchestrate the financial simulation process that really govern the bottom line. So be ready to trade with a comprehensive finance and financing strategy.
Here is a brief summary of the selected types of financing for business enterprises.
Asset Based Loans
Loans secured by inventory or accounts receivable, and sometimes by tangible assets such as property, plant, and equipment.
Bank loans
A loan that is paid back with interest over time. The business will need strong cash flow, strong management, and the absence of things that could drive the loan into default.
bridge financing
A short-term loan for a company to get through a financial slump, such as getting to a next round of venture financing or completing other financing to complete an acquisition.
equipment leasing
Financing to lease equipment instead of buying. It is provided by banks, subsidiaries of equipment manufacturers, and leasing companies. In some cases, investment bankers and brokers will bring parties to a lease together.
factoring
This is when a business sells its accounts receivable at a discount. The buyer then assumes the risk of collecting those debts.
intermediate debt
Debt with equity-based options, such as warrants, that entitle holders to purchase specified amounts of securities at a selected price over a period of time. Mezzanine debt is generally unsecured or lower priority, which means the lender is further back in line in the event of bankruptcy. This debt fills the gap between major lenders, such as banks, and equity investors.
real estate loans
Loans on new properties, which are short-term construction loans, or on existing improved properties. The latter generally involves buildings, commercial and multi-family complexes that are at least 2 years old and 85% rented.
Sales/Lease Financing
Selling an asset, such as a building, and leasing it back for a specified period of time. The asset is generally sold at market value.
start-up financing
Loans for companies in their earliest stage of development.
Working capital loan
A short-term loan for the purchase of assets that provides income. Working capital is used to run daily operations and is defined as current assets minus current liabilities.
It is always better to get ahead without getting into debt. But, on the other hand, most businesses need to acquire financing at one time or another. A home office is less likely to require financing than a commercial location that you rent. A one-person operation is less likely to need financing than one with employees.
When you need financing, remember to examine all the financing avenues available to you and scrutinize the terms of all proposals.
