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Types of financing (part 1)



There are two basic types of financing: debt financing and equity financing. Debt financing happens when business borrow money from a lender at a fixed or floating interest rate for a specified period of time. The most important characteristic is that debt financing is that doesn't give a lender part of ownership. Terms of the loan are dependent upon what the loan is being used for.

Loans are most common and popular sort of debt financing. Business usually borrows from commercial lenders like bank and they offer some collateral as a form of a security for a loan. Loans have fixed periods and they are pay in regular intervals with interest rate. They can be short term, medium and long term in duration depending on the needs of business. Short term loans are used for temporary and seasonal loans. The most common type of short term loan is line of credit, agreement between borrower and lender that establishes maximum amount that customer can borrow and use it whenever he needs it. Medium term loans are generally used for fixed assets, equipment, to provide working capital. They are called term loans or installment loans and they are often used to start small businesses. Long term loans are usually used in real estate financing because it is typically financed over a fairly long period of time, between 10 and 30 years.

Asset based lender provide financing for businesses including, loans for machinery and equipment, real estate etc. and factoring. The business has to ledge its assets in return. Factoring happens when a lender purchase your accounts receivable and gives you the money immediately so you don't have to wait your customer to pay for it, minus the factoring fee. Contrary to banks asset based lenders are not regulated and they can look beyond your balance sheet figures if they think your business has a good strategy and market potential. They will establish the limit on your loan based on your collateral and not your net worth.

Bonds are source of capital for well established companies that need capital for long term growth of their business. Such companies raise funds by selling bonds to different buyers. Bond is essentially a security that represents a loan. Bond holder is person or entity that has loaned money to the bond issuer. Bond holder receives annually interest rate on the bonds and bonds can be of different maturity (length of time before bond issuer pays bond holder).
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