Types of Business Financing

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Types of Business Financing[/color]
Business owners have many choices when it comes to funding a business. With so many things to consider as well as many rules and regulations to follow, financing a business can be overwhelming. Breaking down the financing options into three basic categories helps identify the type of financing a business seeks. From there, the business leaders can seek out the best type of financing in that category based on their size, funding needs and financing worthiness.

Equity Financing: Equity financing is when people have the opportunity to take an ownership interest in the company. Publicly traded companies sell shares in public marketplaces called stock exchanges. When a company does this, they are offering ownership so that they can raise money for the company in an equity financing deal.But publicly traded companies aren't the only ones who offer stocks to raise money. In fact, if you opened a corporation or a limited liability company (LLC), you would issue a designated number of shares when registering with the secretary of state. The original business owner or initial partners own the company stock, but they can issue shares to investors who are willing to take on the risk. Investors can be silent partners who are merely waiting for the value of the company to increase, so that they can participate in profits, or they are active partners helping to build or turn a company around.

Debt Financing: Debt suggests that you owe money. Even publicly traded companies take loans out or have debt instruments, such as a bond issued to investors. For most small businesses, debt financing means taking out some type of loan. How this is done really depends on the business size, the creditworthiness of the company or its leaders, and how much is needed.Many small businesses are started with a loan from a family member. This is common, but it can complicate family holiday meals, if the business is struggling. Another way a small business might start is to have an owner take out an equity loan against his personal home to use in the business. In cases like this, the business owner should take the additional step to properly lend the money from his personal finances to his business, to prevent commingling of assets.
Ideally, a business is able to obtain a business loan from a bank. The Small Business Administration (SBA) has a variety of loan programs with different qualification programs and protections offered to lenders, to encourage business financing. Some businesses are also able to finance a business venture, using a business line of credit or business credit cards. The SBA offers free consultations to review business plans, history and lending options for business owners. This helps the business owner address potential financing issues before going through the process with the bank and getting declined.

Lease Financing: This option for financing is most widely used for machinery, office equipment and business automobiles. Lease financing is similar to a loan, in that payments are made monthly to an agreed-upon contract balance. However, at the end of the contract, the item leased is returned to the leasing party, and the business must enter into a new contract for new equipment. This is a good option when a business wants to ensure that it has updated and current models of equipment and machinery. It also helps in overall cash flow, since leasing options are usually less expensive than borrowing options.Problems of business finance arise when you don't meet the requirements in these types mainstream options.

Reference:https://smallbusiness.chron.com/business-financing-problems-292.html