Financing Basics

The term financing is generally used to explain the acquisition of loans from banks or other financial institutions. Financing is usually given to business owners, both for use as beginners …

Because of the high interest and high risk that comes with financing, small business owners are often forced to evaluate their situation from all angles before making a financing decision. This is because there are various types of loans available on the market, each for different purposes and with varying rates of interest, payment terms, and loan terms. Also, business owners do not want to miscalculate their loan amount, because getting a more considerable loan value will mean a higher obligation to the company while getting a smaller loan will result in an inadequate financing situation.

Conversely, banks or financial institutions function to provide financing facilities to benefit from the interest that must be paid by the borrower. In return, they get the monthly payment amount from the company, including interest. Banks usually provide loans through guarantees of fixed assets to banks as collateral. If a default occurs, the lender will sell the asset to return your debt to them. However, there may be cases that lenders provide loans without the need for collateral, but with higher interest rates and more stringent qualification procedures.

In addition to obtaining financing from lenders, small business owners are also entitled to get loans from government funding institutions such as U.

Small Business Administration ( SBA) provides financing to help spur the growth of small businesses in the country and usually impose more flexible criteria than banks. In the SBA Small Business Loans program, they act as guarantor for borrowers so that they can obtain long-term loans from SBA lending partners.

All financing sources mentioned so far are generally known as debt financing. This type of financing is ideal for companies that have a high equity to debt ratio, meaning that the owner of the company has invested more capital than the amount of debt obtained. In cases where the equity to debt ratio is low, it is difficult for companies to obtain debt financing. Therefore, the replacement is equity financing.

Equity financing is funds obtained from friends, family, or employees in return for shares in the company. Also, venture capitalists are another source of equity financing, which has been a common source of income, especially since the booming dot com.

Venture capitalists are professional investors and are prepared to take very high risks in return for their investments. However, with the involvement of a venture capitalist, more stringent management and accounting procedures may need to be adopted, in addition to the inclusion of venture capitalists in making significant decisions.

It is not easy to get financing from venture capitalists because they expect a high rate of return for their investment in return for the high risks that occur. Many applicants screened through the year, with only a handful going to funded. Also, venture capitalists hope to grow their company into a regional brand name in a short time. Publicizing companies is also one of the main objectives of venture capitalists.

In short, there are many ways in which financing can obtain. In the end, it depends on the business owner to decide which funding source is most suitable for the company. Because there are pros and cons for each, financial and situational evaluation of the company will help to make the right decision.