the right business finance

What Is The Right Type of Business Finance?

Justin HardingUncategorized

Most business failures can be laid at the door of undercapitalisation. A business needs to have funding for business premises, equipment or inventory, if not both, plus staff wages, utility payments and a thousand other things that require cash outlay before a business turns a profit and can become self-funding.

Business Funding is one of the things you will need to consider when keeping a business running during times of constricted cash flow. Business financing can be divided into two types: equity finance and debt finance. The simple distinction between them is that equity finance is a form of investment, while debt finance is a loan.

Equity is the money you put up to start a business or keep your business running until it becomes self-sufficient, or money someone else contributes in return for a share of the business. This type of finance does not need to be repaid; instead the equity partner will receive dividends when profit allows, for as long as the business is in existence or until someone buys him out.

If the business is very profitable, dividends could be far more than the original capital. In addition, you are likely to gain valuable expertise and contacts that your funding partner brings to the table. You could call equity investment a win-win proposition.

Business angels, or angel investors, are entrepreneurs who invest in small business for a share of the profits, while also bringing their contacts and business acumen to the table. Their aid is perfect for the small start-up, bringing needed funds and expert advice to the table. Another kind of equity investor is the venture capitalist. They will typically offer higher amounts of investment capital, but tend to invest in established businesses with lower rates of failure.

Debt finance is purely and simply, a loan. You will be required to pay the money back, with interest, at defined intervals. At first glance, it might seem obvious what would be best for a shoestring start-up. But, consider that with debt finance, you do not have to give up even a tiny part of your control of your company.

Most people think of banks when they consider debt finance, but banks may be reluctant to lend to start-ups or people who are inexperienced in their chosen business. Fortunately, many options are available. Credit cards finance the start-up of many home-business entrepreneurs. Bank overdraft is a workable, though expensive, form of short-term lending. You can consider borrowing from friends or family with proper terms.

However, possibly the most helpful form of debt finance is transactional funding, or online finance companies that specialise in short-term loans to small business at moderate rates. Only you can decide the best type of finance for your business, as all businesses are different.

Do you need to know more about Business Loan Options for your Organisation? Contact our Professional Business Loan Consultants for an obligation free quote today.