Introduction to Financing

Debt Financing

Debt financing refers to the borrowing of money from a lender that has to be repaid to the lender in a fixed time period. Debt financing is only available to business owners who have something of value that the lender can instantly liquidate. The debt finance company is not interested in becoming a partner in the owner’s endeavor, but instead they are in business to make money from their money, letting the owner use it for periods of time. Fixed rate of interest is charged on the principal amount, and it is paid back through regular monthly installments.

Like equity financing there are a variety of methods available to raise debt financing. Traditional banking will always be the least costly source for the financing, but still, bankers are not in business to take on risk. When ask for three years of company tax returns it’s just to see a steady reliable set of profitable growth numbers. Borrowing from the bank relies on two variables, the collateral that secures the loan, and the ability to repay the loan. One might have enough collateral, but if the business is losing money, the bank can't expect one to handle the added expense of loan payments.

Many early stage companies turn to private commercial financing which is better suited to deal with riskier issues. Factoring companies use the loans one make to customers (invoices for finished work) as the collateral for the funding. Equipment leasing companies will allow one to purchase new equipment and pay for it over time, usually three to five years.

Equity Financing

Equity financing refers to the getting the finance for the business, where the investor invests a fixed amount of money in the business and in return they get ownership share in the real estate business. Thus the borrower is not required to pay back the money in a fixed time frame.

Once the owner and investor determine the evaluation of the equity, the owner can then sell parts of the equity in order to raise capital....