Type of Business Finance

Securing finances for your business is one way to ensure its future and growth. A steady flow of business finances ensures you can keep up with responsibilities such as working capital and fuel the business's growth.

For new businesses, financing can be the only way to keep the business afloat and give it a chance at succeeding. This is why you should understand business finance and the different avenues you can use to secure financing for your business.

What is Business Finance?

Business finance is the process of acquiring funds to aid in the operation of your business. It also extends to the administration and accountability of the funds you acquire for the business. Business finances can help your business stay on track, improve daily operations, achieve long-term objectives, and attract more business.

Types of Business Finance

There are two broad categories of business financing models that you can consider, with each option having multiple options underneath it. These two broad categories are:

  1. Debt finance
  2. Equity Finance

Debt Finance

Debt finance is when the business leverages its fixed or otherwise assets to raise capital. A business can acquire debt financing in different ways, but bank loans are the most common one. Under this financing method, your business is expected to repay the financed amount plus interest.

Types of Debt Finance

Bank loans

These are the most common types of debt finance and the most commonly used by businesses. Through a loan, the bank can access a lump sum that they can use to fund their operations or expansions. The business must have a strong credit rating and, in some cases, some type of asset to acquire this type of funding. The principle and interest of the loan must be paid within a specified period through regular payments.

Business credit cards

Business credit cards can support working capital and cover small business expenses. The cards are more accessible than a business loan but can have higher interest rates and fees, which can quickly add up, especially when you don't clear your balance every month. Additionally, business credit cards are limited in financing.

Invoice financing

This is a more flexible funding solution that allows your business to turn its outstanding sales invoices into cash. It's beneficial because the business doesn't have to go through the lengthy application and wait process involved with bank loans, and it is not limited to business credit cards. With invoice financing, the business can finance as many invoices as it needs and receive up to 80% of the value of the invoice as an advance. Most providers offering this service are efficient and can send the funds to the business's account in just a few hours. We are a factoring company that can also help!

Invoice financing might also be a good idea for businesses that don’t have assets yet or want to remain flexible and not tie down their assets as collateral.

Asset finance

Asset finance is a great option for businesses that want to purchase high-value assets. Businesses can consider this type of financing when they want to purchase equipment, vehicles, or real estate.

Asset financing is extremely rigid in terms of what the business can use the funds for. Common asset finance methods include hire purchase, operate-to-lease, and finance leasing arrangements.

In asset financing, the asset the business is buying acts as collateral, allowing the business to avoid putting up more collateral.

Trade finance

This is another type of debt finance that works for businesses in the export and import industries. With trade finance, the business can plug cash flow gaps and mitigate the risks of international trading. It can also be used for domestic trade and other solutions like supply chain finance.

The company uses a third party to finance the transaction for this type of financing, ensuring the supplier will be paid once the goods are shipped. Buyers can also use this type of financing to cover cash flow gaps while waiting for shipments.

Line of credit

The line of credit is a unique type of business finance that helps the business pay for emergencies and everyday expenses and even fund an expansion. It is a more flexible finance method that is always available when you need it. As you take out the funds, the credit limit decreases and increases when you repay the funds.

Merchant cash advance finance

This financing solution is available for businesses that process substantial volumes of customer card payments. The amount the business can access depends on the value of the card payments they process.

After securing funding, the lender will take a percentage of the payment each time you process a card payment. However, when considering this type of business finance, you should know that it comes with high-interest fees. 

Equity Finance

The other type of business finance is equity finance. Unlike debt financing, where a business uses collateral, such as an asset, equipment, or its credit rating, in equity finance, the business gives up a stake in exchange for funding. Another unique feature of equity finance is that there are no repayments or interests, but you must share some control and profits with those who give you the funding.

Types of equity funding include:

Crowdfunding

This funding method is common among startups and innovative companies. It doesn't require the company to have strong credit or collateral to secure financing. Instead, the business puts up a strong promotional campaign to attract the attention of investors who come together and invest in the company.

Venture capital

This business finance option is considered for businesses with high growth potential. It works for businesses that have already achieved some success and appeal to investors.

It can be a tedious financing process because investors will want to audit your business before investing in it. You will also need to always keep your accounts and business plan up to date.

Angel investors

Angel investor financing requires that you have a detailed business plan, up-to-date accounts, and growth potential to attract investors. You must also offer shares or part-ownership of your business in exchange for funding.

The upside with angel investors is that they work with you and use their money to fund investments. The investor also uses their experience and market connections to help your business grow.

Family and friends

You can also secure financing for your business from family, friends, and other well-wishers. While it's not recommended to mix family and business, this financing method can prove crucial when other financing methods are not forthcoming. It is an excellent financing method for startups with supportive family members.

Should you choose this type of financing, you should be clear about the financing terms and how you intend to repay it. Ensure you create a basic contract outlining the share of equity or repayment to the lender.

Conclusion

Business financing can be a juggernaut for entrepreneurs and established businesses. Choosing the right type of financing for your business will provide you with cash flow and flexible repayment terms that you can easily keep up with.

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