If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can't over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

For start-ups, it's understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can't do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn't need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn't lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business's worth is made before the deal is done.

Financing a business shouldn't be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.

About the Author

Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution's Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.

Business Lines Of Credit - Article by Eddie Tobey

Banks constitute an important institutional source of financing the working capital requirements of business. Banks consider various aspects such as production and marketing plans of the customer while determining the credit requirements. The amount so determined by the bank is known as credit limit. Bankers are required to fix separate credit limits for various types of credit facilities to be extended to various types of borrowers. Margins are kept by the banker before granting credit. This is based on the principle of conservatism and is decided to ensure safety of funds.

Banks extend the following types of facilities to customers: Over draft, cash credit, purchase or discounting of bills and demand loans. Over draft is a temporary arrangement where by the customer is allowed to draw over and above the balance standing to the credit of the customer. This facility is available only for current account holders whereby the borrowers are permitted to withdraw and repay the funds whenever they desire within the overall stipulations.

Under cash credit facility, a borrower is permitted to withdraw funds from the banks up to the sanctioned credit limit. The borrower withdraws the money over a period of time depending upon his credit requirements and repays the same by depositing the surplus funds in his cash credit account. Interest is charged only on the actual balance utilized by the borrower. These advances are granted on the security of current assets. It is considered to be the most flexible form of finance from the borrower point of view.

Demand loans are called the ad hoc or temporary financial accommodation granted to customers to meet unforeseen contingencies. The borrower has to pay a higher rate of interest on these types of advances. For providing the above type of financial facilities, the banker creates a charge by way of hypothecation, by way of pledge, by way of mortgage and by way of lien.

Business Credit

Adequate finance is required to meet the various commitments arising out of business transactions. The financial requirements of business can be broadly classified into two categories, viz., short-term sources and long-term sources.

Short-term finance is required to meet the working capital requirements of a business firm. These are the funds required for a period up to one year. The sources of short-term finance are trade credit and bank borrowings.

Trade credit refers to the type of credit provided to customers by suppliers of goods in the normal course of business transactions. This is a kind of deferral payments on the part of buyer. It is the most popular type of credit among the traders. Small firms depend on this type of credit heavily as they find it difficult to obtain bank finance. Trade credit is usually granted on an open account basis. This implies suppliers sending goods to the buyers on credit and buyers accepting the same and agreeing to make payment as per the terms and conditions.

Trade credit becomes a routine activity between the suppliers and the buyers. Trade links are established between them. The open account credit appears on the buyer's balance sheet as sundry creditors. Trade credit also takes the form of bill payables. This happens when the buyer signs and accepts a bill of exchange to evidence the credit sale transaction. A Bill of Exchange recognizes an obligation on the part of buyer.

Banks constitute an important institutional source of financing the working capital requirements. Banks consider various aspects such as production and marketing plans of the customer while determining the credit requirements. The amount so determined by the bank is known as credit limit. Bankers are required to fix separate credit limits for various types of credit facilities to be extended to various types of borrowers.

About the Author

Business Credit provides detailed information on Business Credit Cards, Business Credit, Small Business Credit Cards, Business Lines Of Credit and more. Business Credit is affiliated with Secured Business Credit Cards.


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Financing Your Small Business - Article by Tony Jacowski

About the Author

Business Lines Of Credit - Article by Eddie Tobey

Business Credit

About the Author