Businesses need financing both at the startup stage and when it's time to expand production, improve products, and hire new employees. The amount of additional funding can vary, from funds for website updates to technological changes within the company.
The need to attract funds arises when there is a need to repay debts or address gaps in cash flow.
It should be noted that if a project constantly has to cover debts or unplanned payments, it is worth reevaluating the business model. The goal of additional financing is business development, expansion, and scaling, rather than just maintaining the viability of processes.
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Types of business financing
When considering financing, it is important to have a clear understanding of the amount needed and whether the organization can afford loans or credits. The method of attracting funds to a company depends on its scale, product, and experience in the business.
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Bank loans: To obtain a bank loan, a business plan, credit history, and collateral will be required. The loan amount, interest rates, and repayment schedule are fixed, making them predictable. By obtaining and repaying a loan, the company enhances its reputation, which allows for future collaboration with financial institutions. Start-up companies may face difficulties as they will need to demonstrate their reliability.
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Online lending: Online lenders offer a faster and easier process for obtaining funds, with a wider range of loan options. At the same time, there is less bureaucracy and preliminary business checks, which is advantageous for start-ups and new businesses. Lenders offer flexible payment systems and lower interest rates compared to banks.
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Small Business Administration (SBA) loans: To become a participant in the Small Business Administration program, one should submit an application to one of the banks listed by the SBA. This method of financing involves low interest rates, extended repayment terms, and various credit programs. Paperwork will be required for application, which means more time will be needed to obtain the funds.
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Crowdfunding: Involves raising funds from individuals who are interested in supporting the business through specialized online platforms. The conditions for investors can vary, such as receiving a percentage of equity, rewards in the form of services or products from the company, or donations. This financing method requires creating a business model or product that will attract a large number of supporters. The process can take a significant amount of time.
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Venture capital: Companies can receive funding from a fund that specializes in supporting growing businesses. The terms for receiving funds usually involve a share of the company's equity. The risks of such a collaboration include the fund becoming a partner in the business, setting conditions for its management, and exercising control over the processes within the company.
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Direct investment: An investor invests their funds in exchange for anticipated profits and expects a high return on investment. Control and ownership of the business are somewhat diluted in this financing option.
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Grants and subsidies from the government: Governmental and private organizations provide financing based on their mission, societal value, and potential for development. This type of financing involves writing a grant application that demonstrates the viability of the business, the ability to report on all stages of work, and showcases the predictability and low risks of the enterprise.
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Business financing options
The type of business financing depends on the purpose of the funding, the method of fund disbursement, and how the company plans to repay the loans. Based on these criteria, three types of credit can be distinguished.
- Short-term loans for 1 year: These loans are used to support the day-to-day operations of the company or enterprise.
- Medium-term loans from 1 year to 3 years: These loans are provided for investment financing as well as the daily operations of the company.
- Long-term loans exceeding 3 years: These loans are granted for large-scale projects, reconstruction, modernization, and business expansion purposes.
Business loans help cover operational expenses as well as the acquisition of assets, equipment, and the opening of new company branches. The loan is provided for a fixed period during which both the principal amount and interest must be repaid. There are different types of loans, including secured and unsecured loans, as well as open-end and closed-end loans.
- Secured loans: To obtain a loan, a company needs to provide financial institutions with collateral documents that confirm ownership rights, assets, as well as company shares, bonds, or property.
- Unsecured loans: Borrowers do not need to pledge assets and property as collateral. However, in such cases, the lending institution assesses the financial condition of the company applying for the loan, evaluates its creditworthiness, reputation, and based on that, makes a decision
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Engaging financial experts help in selecting the best financing option for a business. They conduct an analysis of the company's activities, assess its potential and project viability, and identify a financing model that will bring maximum benefits. A consultant is familiar with the histories of credit organizations and the specifics of credit agreements, and can warn against potential risks and unfavorable deals.
