When you are a small business owner or large company CEO or when you start a startup, one of the real choices is the way to back your business with its financial needs. There are two alternatives for raising funds for business growth i.e. equity financing or debt financing. When you choose to raise funds through debt finance, there are different choices to be made as there numerous alternatives for debt financing as well. It is equally important to consider as raising fund for your organization. Broadly is been categorized under 2 types of debt financing i.e. Long term debt financing and short term debt financing. For example: secured business loans, equipment loans, unsecured business loans, etc. comes under Long term debt financing. Most long term financing programs expect you to promise security or assets under a business entity to borrow the loans.
Types of Debt Financing for Small Business / Startups / Companies:
Here are some of insights of debt finance that is accessible to private companies. Let us have a look at each type of debt financing for small business, startups or large companies:
1. Bank Loan:
In short, debt financing means borrowing loan on the interest of an enterprise. The most widely recognized sort of debt financing across the world is a bank loan. An Interest rates and processing fees may change by lenders to lenders. You should do your research proceeding to borrow funds.
2. Unsecured Business Loans:
This type of long term debt financing requires no guarantee or no collateral and a individual financial assessment itself is required for approval. As a parameter for lenders or banks, your business may likewise need to produce a specific income for a particular timeframe for you to fit for loan. Unsecured business loans can have interest rate between 5% – 18% with repayment period not more than 10 years. They can utilize these funds to pay for any operational expenses of business. A few loan specialists have limitations on utilization of funds.
3. Secured Business Loans:
This is other best types of debt financing for large companies which requires a promise security / assets as collateral for your loans approval. An individual financial assessment is not required for loan approval process. Placing asset on risk that is part of a business for operation and has steady income is the way to get approval of secured business advance. Terms are as similar as unsecured business loans but the interest rates are quite lesser when comparing with unsecured business loans. For example: It’s same like when an individual apply for personal loan or when someone apply for home loan with lesser interest rates when compare to personal loans.
Another important type of debt financing is bond issues. Firstly when traditional kinds of bond are issue, an investor or lender gives loan to your company as a debt investment for a specified timeframe at a fixed or floating interest rate. Secondly, when a bond is issue as debenture. A debenture is an unsecured loan certificate issued by an organization. Thirdly when a bond is issue as conveyor bond or bearer bond. This kind of bond expressed that whoever held this bond was owed the cash. In the later stage, it was prohibited because of the fact that it was one of the natural ways to use for tax evasion.
5. Equipment Loans:
These is another crucial types of debt financing for startup which can be utilized for buying hardware / equipments that has a long life (and doesn’t wind-up or out-dated rapidly). You will require a decent individual financial assessment to meet all requirements for an approval of equipment loan.
6. SBA Loans:
It’s like an Independent Administration works with various group of moneylenders and banks that give loans to private companies in their area. This is important types of debt financing for small business. You can apply for a microloan or even a line of credit through SBA debt financing. The SBA doesn’t loan cash straightforwardly to private company, rather, they give the assets to middle people (i.e. your neighborhood financial lender or institution or group banks) and they loan the cash to you. You can search for intermediaries for SBA loans in your area.
It is essential to think about the majority of your alternatives in choosing how to back your enterprise. Your efforts to obtain future financing will be affected by your past financing. For instance, banks look to the use of your organization. Basically it is the measure of debt in the firm or company. Banks might be more careful about high debt financing and its utilization under your organizations.
In whole, consider the greater part of your choices with respect to how to back your partnership. There are numerous alternatives accessible with respect to both equity financing and debt financing. See the greater part of the advantages and weaknesses of the two types of financing. Counseling with an accomplished lawful group can help you genuinely and explain you of a wide range or types of debt financing.
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» e-Learning Chapter 5: Types of Equity Financing for Business and Startup Companies
» e-Learning Chapter 6: Advantages and Disadvantages of Equity Financing
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