Most businesses need financing. Unless you won the lottery or inherited a fortune most people start a business with either their own funds or a combination of their funds and financing. Even an established business needs financing at one time or another.
Cash flow is different than profits and profits do not guarantee money in the bank. Entrepreneurs need financing for inventory, payroll, expansion, develop and market new products, 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 getting financed is neither clear nor predictable. The financing strategy should be driven by corporate and personal goals, by financial needs, and ultimately by the available alternatives. However, it is the entrepreneur’s relative bargaining power with investors and skills in managing and orchestrating the finance drill process that actually governs the final outcome. So be prepared to negotiate with a financing strategy and complete financials.
Here’s a brief rundown on selected types of financing for commercial ventures.
Loans secured by inventory or accounts receivable and sometimes by hard assets such as property, plant and equipment.
A loan that is repaid with interest over time. The business will need strong cash flow, solid management, and an absence of things that could throw the loan into default.
A short-term loan to get a company over a financial hump such as reaching a next round of venture financing or filling out other financing to complete an acquisition.
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 the parties of a lease together.
This is when a company sells its accounts receivable a a discount. The buyer then assumes the risk of collecting on those debts.
Debt with equity-based options, such as warrants, which entitle the holders to buy specified amounts of securities at a selected price over a period of time. Mezzanine debt generally is either unsecured or has a lower priority, meaning the lender stands further back in the line in the event of bankruptcy. This debt fills the gap between senior lenders, like banks, and equity investors.
Real Estate Loans
Loans on new properties-which are short term construction loans-or on existing, improved properties. The latter typically involves buildings, retail and multi-family complexes that are at least 2 years old and 85% leased.
Selling an asset, such as a building, and leasing it back for a specific period of time. The asset is generally sold at market value.
Loans for businesses at their earliest stage of development.
Working Capital Loan
A short-term loan for buying assets that provides income. Working capital is used to run day-to-day operations, and is defined as current assets minus current liabilities.
It’s always better to get by without taking on debt. But on the other hand, most businesses need to acquire financing at one point or another. A home office is less likely to require financing than a business location that you rent. A one person operation is less likely to need financing than one with employees.
When you do need the financing, remember to examine all avenues of financing open to you and scrutinize the terms of all the proposals.