Statistics show that there are around 58 million people employed in the small business sector in the United States. Small business is therefore indispensable to our economy.
If you're new to the world of business, you may be wondering about the different types of financing available to you.
Depending on the nature of your business, costs in the early stages may run very high. Finding the right type of financing at this point is crucial to the survival of your business.
Read on as we look at the different types of financing available to businesses, and the advantages of each type of company funding.
Debt vs. Equity
The two broad types of business financing are debt financing and equity financing.
Equity financing involved a business owner selling a percentage of their company for cash. This cash is then used to fund business operations. The person to whom the equity is sold becomes a shareholder.
Debt financing does not require business owners to release any of the ownership of their company.
Instead, they approach a lending facility (usually a bank) and borrow the necessary money. This is then paid back with interest over a certain period.
Debt financing is more commonly used by start-ups. Their value isn't usually high enough to secure a worthwhile price for their shares.
Common Types of Debt Financing
The following are some of the most commonly seen debt finance structures for businesses.
Term Loans
Term loans are sums of up to around $600,000. They are generally paid back over periods of 1-5 years.
These kinds of loans are generally taken out for large purchases, such as new premises. Term loans tend to have fewer process requirements than traditional bank loans.
Equipment Financing
These loans fund the purchase of specific equipment that the borrower needs to purchase.
The equipment itself will then provide collateral for the loan. This means that equipment financing is often available to businesses with poorer credit scores.
Commercial Real Estate Mortgage
Commercial real estate mortgages are similar to equipment financing loans. However, instead of equipment, they fund the purchase of property and premises.
If you need to build or buy a new place of business, this is the loan for you.
Standby Letters of Credit (SBLCs)
A standby letter of credit is a guarantee from your bank that they will make a payment on your behalf in the event that you cannot.
Standby letters of credit are often used by businesses that find themselves in tough situations. The bank guarantee makes other parties less reluctant about trading with such a business.
If you're considering applying for this type of credit, check out these SBLC providers.
Which of These Types of Financing Will You Use?
These types of financing or funding, and many more besides, can help you get your business to where it needs to be. Choose wisely between these different types of financing for your specific company needs.
Did you find this article on different types of financing and funding available for businesses valuable? If so, be sure to have a look at some of our others! We regularly post content on finance, funding, sales, investing, marketing, and much more on the Bootstrap Business Blog.
