Types of Financing

Debt Financing
Debt financing does not give the lender ownership control, but the principal must be repaid with interest. Length of the loan, interest rates, security and other terms depend on what the loan is being used for.

Commercial Bank Loans
A. Short-term: Loans for short periods (30 - 180 days) usually made to cover temporary or seasonal needs for inventory or personnel. These are common for established businesses,but may be hard for a new business to obtain.
B. Medium to long term: These loans may be repaid over anywhere from 1 to 5 to even 20years depending on how the funds are used. The source of repayment is the cash flow of the business. Typical uses are for equipment, fixed assets, etc. Most loans to start a small business will be of this type.
C. Real estate financing: Real estate is typically financed over a fairly long term, 10 to 30 years. Expect a down payment of about 20%.
D. Accounts receivable financing: Money loaned against accounts receivable pledged as collateral.

Equity Financing
Equity is money put into a business by the owner, private investors, and/or venture capitalists. Equity gives an investor ownership and possibly some control of the business.
A. Your own savings: It is nearly impossible to start a business without using some of your personal funds. It is hard to convince someone to take a risk in your idea if you do not.
B. Friends, relatives, business associates, etc.: Most small businesses get started with this kind of help. They may provide some of the cash or may back a loan from a financial institution.
C. Venture capitalists:Groups invest in a new firm, looking for an obscenely high return on investment.Minimum investments are from several hundred thousand to millions of dollars.

Internal Financing
A. Customers can be a source of temporary financing if they provide the raw materials or if they pay a cash deposit. This is not feasible in most businesses.
B. Trade Credit: Once you have obtained a good reputation with your suppliers you may be able to have credit for anywhere from 30 to 90 days. You may be able to order, receive and sell the goods before the bill is due.
C. Profit: Hopefully you will earn enough profit to be able to invest in and expand your business.

Leasing
Leasing is simply another form of financing. Leasing reduces the cash needed up front, but like a loan you are obligated to the payment for a certain period of time. Some lease contracts give you ownership of the leased item at the end of the term for a specified amount. If your credit is less than perfect,leasing may still be an option.Leasing companies and manufacturers are sometimes less stringent with their lending practices because they are usually leasing equipment that can bemeasily repossessed. This might be a good option for vehicles, heavy equipment, computers, phone systems, etc.

Regards,
Rofik Lee