What is business financing ?
Unless your business has Apple’s balance sheet, you’ll likely need to access capital through corporate financing. Even many large-cap companies regularly seek injections of capital to meet their short-term obligations. For small businesses, finding the right financing model is vitally important. Take money from the wrong source and you could lose part of your business or find yourself locked into repayment terms that hinder your growth for many years.
KEY POINTS TO REMEMBER
- There are several ways to find financing for a small business.
- Debt financing is usually offered by a financial institution requiring regular monthly payments until the debt is paid off.
- In equity financing, a business or individual invests in your business, which means you don’t have to pay the money back.
- However, the investor now owns a percentage of your business, maybe even a control.
- Mezzanine capital combines elements of debt and equity financing, with the lender typically having the option of converting outstanding debt into business ownership.
What is Debt Financing ?
Debt financing for your business is something you probably understand better than you think. Do you have a mortgage or car loan? These two forms of debt financing. It works the same way for your business. Debt financing comes from a bank or other lending institution. Although private investors can offer it to you, it is not the norm.
Here’s how it works. When you decide you need a loan, you head to the bank and fill out an application. If your business is in the early stages of development, the bank will check your personal credit.
For companies that have a more complicated corporate structure or have been around for a long time, banks will check other sources.
The bank will want to look at your books and will likely do other due diligence in addition to your credit history.
Before applying, make sure all business records are complete and organized. If the bank approves your loan application, they will set up payment terms, including interest. If the process is very similar to the process you’ve gone through many times to receive a bank loan, you’re right.
