Financing is the act of providing funds for business activities, making purchases or investing. Financial institutions and banks are in the business of financing as they provide capital to businesses, consumers and investors to help them achieve their goals. PATC is here to help you understand business financing, keep reading the blog as we explore your options.
Three types of financing available when thinking of starting or expanding a business are
Private loans from family, friends or other interested parties
- Bank loans in the form of either overdrafts or fixed period personal or business loans
- Term financing such as hire purchase or leasing
In the case of private loans, entrepreneurs often find themselves limited by the amount of money a family member has available. These loans are also often unstructured, leaving the entrepreneur open to uncertainty and even abuse, or there is an expectation that they will be paid back within a very limited time period and/or at a rate of interest higher than that available through a financial institution.
Many small businesses are started with private loans, but a major inhibitor for this source of funding can be the requirements by the family member or friend providing the funds to be “hands-on” and even “hands-in” involved in the business.
In the case of overdrafts, bank loans and term financing, the amount available to the entrepreneur is limited by the security he or she can offer against the loan. This usually takes the form of property, fixed assets and insurance policies, or in the case of term-financing of moveable assets it will be the underlying asset item that is funded.
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An overdraft is ideally suited to managing cash flow.
Business Revolving Credit
Business Revolving Credit this is a line of credit available as and when it is needed, with repayments typically being fixed monthly instalments. The original limit is usually restored after a set percentage has been repaid.
Medium-term loans are ideally suited for capital expenses and repayable for a period of two to seven years but can be longer. Interest and repayment tend to be linked to prime, how much collateral you have, and the value of the asset you need finance for.
Business Mortgage or Property Finance
In the event you wish to buy or renovate property for your business or convert part of a residence into office space, this is the loan to investigate.
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Also, when making use of these forms of financing, the financial institution in question has no vested interest in the business’ ultimate success or failure and so provides no on-going business support. The collateral and deposit (or own contribution) requirements often make this an option that is out of reach of many aspiring entrepreneurs.