Small business financing generally refers to the way by which an aspiring or already existing business owner obtains cash to begin a new business, buy an existing business or increase cash to finance future business activity. Business financing is a critical resource for many businesses seeking to meet their financial obligations. The Small Business Administration loans provide small business owners with the cash they need to acquire new equipment, expand into new markets, or fund research and development programs. These loans are not interest free and do require repayment after the period of lending has expired, but if you can repay the loan early you will not have to forfeit any of your capital, which will allow you to use the funds to its fullest extent.
Debt financing, on the other hand, is a more common way of obtaining small business financing. Debt financing occurs when companies sell their stake in a business in exchange for a loan from an investor. The Small Business Administration, a federal agency, manages these transactions on behalf of lenders through SBA loans. In return, lenders offer a specific amount of cash to companies that agree to guarantee payment on a specified term. The two types of debt financing include secured debt financing and unsecured debt financing.
Secured business finance loans are available to small businesses that have a consistent source of income and have the ability to pay the loan back within a specified period of time. This option is popular among first-time business owners because it allows them to raise relatively low-risk capital. Lenders also prefer this type of capital financing because there is no need to provide a credit history. First-time business owners also find it easier to obtain than unsecured business financing because they do not have to submit security for the loan.
On the other hand, unsecured business financing requires the submission of collateral and the assurance that the business will be able to repay the loan within a specified period of time. An unsecured business financing has a number of advantages over secured business financing. The most significant advantage is the fact that a company does not need to provide security or a credit history. However, unsecured business financing has disadvantages too. A company’s cash flow may be affected if the credit rating of the lender drops.
Commercial bank loans and credit card loans are two of the most common forms of financing used by small businesses in the first circle of capital structure. Businesses can get small business financing by means of personal savings, personal credit cards, lines of credit, business credit cards, consumer credit lines, merchant cash advances, and venture capital. These loans are used primarily for start-up and expansion expenses. In order to get commercial bank loans and credit card loans, a company must demonstrate to a bank that it has a potential to repay the loan on or before the due date. A bank usually prefers to issue small business financing to companies that have at least one year of experience in their industry. A company that has been in operation for three years or more is considered to be in the first circle of capital structure, and a bank looks forward to this kind of loan repayment.
Small business financing also takes different forms. A merchant cash advance is a good example. This kind of financing allows a company to pay for unanticipated expenses, such as when its cache storage facility or warehouse needs to be repaired. The bank may require a borrower to have a certain percentage of the new capital value of the business before it can access its line of credit. Business owners using merchant cash advances need to make repayment promptly after the credit is obtained.