Business financing meaning
Business financing simply means the funds availed by business owners to carry on the business expenses. These expenses include the preliminary expenses, commencement of a business, obtaining top-up funds to finance business operations, etc.
There are two types of business financing: equity and debt financing.
The purpose of business financing is to allocate resources, forecast economic needs, review opportunities for equity and debt financing, and also for other functions in your business organization.
Business financing options
The source and application of the funding for the business needs depend on the purpose of the loan. Let’s discuss the various types of business financing that can be carried on by a businessman.
Equity financing is the process of selling a stake in your business for an amount of funding. It is not a loan with an obligation to repay.
Investors through equity financing buy shares in the company to earn income in the form of dividends and also when they sell these shares.
Angel investors are wealthy individuals who wish to invest some amount into a single product instead of starting a business.
They are helpful for someone who needs a capital infusion to fund the development of their business.
Before investing in a particular project, angel investors go through some research that includes:
- The commitment and integrity of the founders of the business
- Market opportunity and the potentiality of the company
- Proper business plan and any evidence of obtaining traction towards the business plan
- Technology and assets involved
- Valuation of the project
- Viability of raising additional capital
Venture capital is a form of private equity where the investors provide funding to startups or small companies which are believed to have long-term growth potential.
Investors under venture capital are generally well-off investors, investment banks, and any other financial institutions.
A venture capitalist, in most cases, is usually a firm rather than an individual. This firm may contain a team of lawyers, accountants, investment advisors who perform due diligence about any potential investment.
Firms under venture capital deal in large investments which make the process slow and complex.
Debt financing is a process of borrowing the money which you need to pay back with a certain interest.
Debt financing includes bank loans, mortgages, loans from an external source. Debt financing can also include debentures.
Debt financing can come from any financial institution like banks or any other lending institution.
Before you apply for debt finance, just make sure that all the business records are complete and organized.
Loans from Banks
Loans from Banks and Non-Banking are debt financing. This type of loans are procured for the following purposes:
- Working Capital
- Operating expenses
- Purchase of inventory and equipment
- Fund requirement for expansion.
External Commercial Borrowings
Funds can also be obtained from many non-resident lenders known as the External Commercial Borrowings (ECB).
The ways of funding under ECB are:
- Buyer’s credit
- Bank loans
- Securitized instruments
- Supplier’s credit
Venture debt is a type of debt financing to venture-backed companies by specialized banks. It can complement venture capital and give value to fast-growing companies and their investors.
Venture debt is especially available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral.
The term crowdfunding is the practice of funding a project by raising money from more than one source.
The money is raised from a large number of people who wish to contribute a relatively small amount, which in turn results in a whole lot.
It allows startup entrepreneurs to increase their startup funding for helping their business grow.
Small business loans
Small business loans are available from a large number of lenders. These types of loans can help in the growth of your business and fund new research and development.
These small business loans are of different types based on your business needs, the loan amount and some particular terms of the loan. These types include:
Line of credit
Under a small business line of credit, your business can access funds from the lender as much as needed.
A line of credit is used for managing the cash flows and unexpected expenses of a company. You will be charged an amount fee to set up the line of credit.
Interest under these loans is typically paid monthly and the amount of principal drawn down on the line is to be amortized over a few years.
An accounts receivable line of credit is a credit facility provided to different companies by securing it through the company’s accounts receivable.
It helps you to get cash immediately on the limit based on your accounts receivable.
Working Capital loans
Working capital is the amount required to carry on with the daily operating expenses. So, a debt that is availed to meet these expenses is called a working capital loan.
These loans can be either secured or unsecured depending on the requirement of the lender and the credit history of the borrower.
Small businesses that have to take up the equipment of huge cost need a loan to purchase the required equipment.
This generally requires a down payment of the purchase cost of the equipment, and the loan is secured by the equipment itself.
Direct online lenders
There are many lenders available online that make it easy to get small business loans easier.
Reputable companies give very fast business loans in the form of cash advances, working capital loans, and short-term loans.
Small business credit cards
Many credit card lenders especially check to provide credit to the small business market. It has many special benefits like cash backs, airline mileage points, and many other rewards.
Interest rates for these credit cards are rather high which might range between 5% and 19.9%.
The owner’s credit score and credit history are linked to these credit cards. This means that if there are any defaults in the repayment of the loan amount, it would affect the personal credit rating.
The process to apply for a small business credit card can be through your bank or apply online for the credit card.
Mezzanine capital is the capital obtained by combining the best features of equity and debt financing.
Debt capital might give the lending institution a chance to covert the loan amount to an equity interest in the company in case of failure of loan repayment on time or in full.
There are many types of funding options available for businesses. It is important to wisely choose the mode of financing for the business financial needs.