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Financing a small business

small business

To make money, you must first invest it - this is the basic principle of business school. Some projects require more financing than others: car dealership may need a million to invest in its showroom. Even companies dealing with snow removal or lawn mowing (two with small businesses, which we discuss in this book) must have some cash for the purchase of equipment and means of transport.

But if you plan to expand its area of operations, hire staff and offer more sophisticated services, it is important to have enough funds for such investments. Such capital must very sensibly manage, as well as other components of the company.

If you use your own funds, you need to be sure that your business plan and actions have a solid foundation.

If you use external sources of funding - the bank, the investor or government agency - you need to be sure their project and be aware of the credit risk.

Two basic models of financing business, the financing and equity financing of foreign capital.

Equity versus foreign capital

Equity is an investment in the property business. Capital can come from private resources from family, friends, employees, customers or outside investor, including the investor in the form of a venture capital fund, which is interested in buying companies with high growth potential. Investors wlasnosciowi usually acquire a stake (and some control) company; from the point of view of the company's founder external investor reduces its ownership rights and deprives him partial control over the company.

Foreign capital constitute any obligation in relation to other operators in the external environment of the company (and depending on the legal form of the company is also an obligation of the owner company). Creditors may be banks, offering commercial loans, contractors, suppliers and government agencies.

The loan can be used for ongoing operations, the purchase of equipment and short-term goals, such as eg. The purchase of goods.

Foreign investors are interested in estimating the debt ratio of the company. This ratio determines the amount of borrowed cash or only planned loans in relation to the size of equity. The greater the equity contributed by the owners, shareholders, the more willing the lender to extend credit.

Compare this situation to buy a house. Lenders willing to agree to a mortgage if the borrower puts a significant investment home equity. There is a theory according to which the client invests part of its funds is more robust and wiarygodniejszym borrower of which only uses the funds of others.

Types of loans

The credit line is like a personal credit card - the amount of credit is available for a limited time at the disposal of the borrower, who can use it in the amounts and dates convenient for him. The borrower pays the monthly interest on the funds available.

Installment loan borrower provides substantial financial resources and repaid in installments within the prescribed period.

Short-term loan is earmarked for a specific purpose: payment of the purchase of goods, to stabilize the liquidity etc. The loan is repaid after the dissolution of the problem situation.

Long-term credit is allocated for capital expenditure, including the purchase of equipment and real estate, and is repaid from current revenues.

Loan security

From the point of view of the lender riskiest credit unsecured - in this case, the borrower consists merely a promise to repay the loan. A credit card is an unsecured loan and usually charged a higher interest rate than a secured loan.

Lenders prefer to loan collateral in the form of physical things - a secure value. For example, if you buy a car, the lender owns it until the loan is not repaid. If the debtor for some reason fails to meet its payment obligation, the lender has the right to stop the car and sell it to recover all or part of the amount borrowed.

In the case of loans to commercial banks or other lenders may require an individual client or institutional collateral in the form of a pledge or lien rights. The company can, for example, to set a part of the property mortgaged or unloaded equipment, receivables and other valuables. Individuals can establish a lien on the property of his own, cash investments, insurance policy or zapomodze death benefit under life insurance.

For some individual loans the lender may require a written guarantee by a third party. A guarantor is a person obliges to repay a certain amount of the loan (credit), if the debtor fails to do so within the deadline. Similarly, the co-debtor, except that a creditor may be required to repay the debt from both the debtor and co-debtor. The guarantor is the third person, which guarantees the repayment of the remaining amount of the debt, if for some reason he did not debtor; the guarantor may be enjoying a good opinion of the institution or company. In some cases, government programs or private agree to guarantee the loan, in order to help small business in obtaining financing.