The Basics of Financing
Money makes the world go around. It may seem like a cliché, but no matter what the business, there is a need for capital to move forward with plans for growth. Financing is one of the quickest ways to get the capital your business needs and do so in an expedited time frame. However, getting the necessary financing can be a complex undertaking based on the type of business and the investment the owner is seeking.
How Financing Works
Financing is the process by which banks or individuals lend money to business to be used as an investment in their growth, through equipment, real estate, or day to day operations. These loans will traditionally come with interest, which will accumulate over time until the debt is paid off. This is done so that the lender is not only earning money on the loan but so the loan is paid off within the set expectations of the agreement.
There are risks for the lenders, such as the possibility that the borrower is unable to repay the loan, or that circumstances change that alter the original expectations on repayment. To mitigate these risks many financing vehicles will require the business owners to put up collateral as a means of ensuring the risk the lender is taking on the investment.
What a small business owner needs to do for financing
Because financing uses other people’s money to inject capital into a business there are some essential things that business owners need to consider when seeking a loan or other financing agreement. The business owners need to consider if they are comfortable putting their personal or company property up as collateral for the loan and if they are able to pay it off. It is important to factor repayment into your business plan to make sure you are calculating the cost of the repayment accurately.
How to tell if it is a good option for a business owner.
Do the owners have the means to repay a loan? If so then financing can be a good option, especially if the owner is looking to expand the business. The owner who can repay a loan and who knows with certainty that their business is or can be successful is a perfect candidate for a loan.
Another thing to consider is if they have a business plan to help manage and prepare their company. This can not help only determine if a financing through a loan is a good idea, it can also help the owner determine how best to use the financing in their growth. If an owner does not have a business plan in place it is easily remedied with assistance from financial planners and their advisors.
How to get financing
There are several places where financing can be obtained, including banks, angel investors, and other lenders. Each group will have different requirements and expectations for the financing agreement. For example, different banks will have different requirements for offering financing and loans. And some lenders may only deal with certain industries, like tech startups.
The process for getting approval for financing will vary from lender to lender, but will generally require a check of the borrower’s finances, their credit history, collateral, their company’s financial history, and other factors to help them determine whether the loan would be a wise investment. The process can be long and drawn out because banks and other financing entities are risk adverse. They want to avoid the possibility of losing money and may be hesitant to offer, and quick to deny financing.
Luckily this does not mean that financing is out of reach. If you have been turned down for financing previously, or need help understanding the various rules and expectations around financing, we can help.