Ways to Finance Your Business

With so many types of business financing available today, it is advisable to check carefully which type is best for your specific purpose.

The most traditional type of financing is debt financing. This is a straightforward loan that is repaid with interest over a certain pre-determined period of time. Generally, it is not an unsecured loan and will require some form of collateral against default. Debt financing can be either short or long term.

Your business may qualify for a line of credit. This loan is generally attached to your chequing account and can help when your cash flow fluctuates greatly. Some business entrepreneurs have secured lines of credit using their personal assets as collateral.

The easiest money that is available quickly is borrowing from your credit card. Although the cash is available immediately, the rates of interest are extremely high compared to commercial loans. This truly should be a last choice option.

Often, a supplier of equipment or machinery will offer financing for your purchase by providing payment terms of 30 – 45 days or extended payment plans with interest. Merchandise is sometimes sold on consignment whereby the buyer only pays for merchandise that is actually sold.

Equity investing involves funding by investors who, in return for their investment, receive a share in the ownership of the business as well as a percentage of the profits. Generally, equity funds are unsecured against the company's assets. If a business owner is trying to raise a large amount of money, it may be possible to use both equity funding and loans against assets to secure the needed amount.

Depending on the type of business you own, there are various types of equity funding available. Angel investors generally are wealthy investors who invest in small businesses and are looking for a healthy return on their investment. Venture capitalists primarily invest in high-tech or leading edge businesses in return for partial control and management.

Large businesses seeking finance may sell shares of their business on the stock exchange. Profits from the company's growth are shared among the shareholders.

Whichever method you choose, be sure that you and your financial advisor examine all the options carefully before any cheques are written.

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Tips for Business Financing

The bottom line is that most businesses need some type of financing, if you don't have enough personal capital. There are numerous options available in today's market. Before borrowing from any source, conduct thorough research to learn how much the loan will actually cost and if that is the best option for you.

Before you approach any type of lender, you will need to prepare or update your business plan. Every lender needs to be convinced that you have the ability to repay the loan. A well written, detailed professional business plan will demonstrate to the lender that your business will indeed generate profits to enable repayment.

In some cases, a lender may require more collateral than the business can offer. The business may seem to have potential but the actual projected profits are slightly questionable. You may be asked to put up personal assets (car, home, personal investments) as additional collateral for your business loan.

Keep in mind that lending money is based on assessing risk and return. You may seem like a terrific person but that will only get you through the pleasantries of meeting with the lender. Getting down to the issues, the lender is in the business of lending money and making a profit from that loan. Therefore, you will have to demonstrate that your business does not present a risk and, moreover, that the loan will be guaranteed and will yield the return that the lender is interested in earning. Anything less than meeting the lender's expectations may result in not securing the loan or investment.

As a business loan or investment can be quite complex, and there are various tax issues to be concerned with, both personal and business; so it is most advisable to discuss all your options with your personal tax advisor. Although your business may need an immediate influx of cash, take the time to examine and consider the best options for your needs.

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