Financing Sources and Types to Ensure Successful
Money is of extreme importance nowadays. Almost everything that
we do involves money. The same is true if one wants to venture
into business or buy a home which is one of the basic needs for
survival. Financing or supplying of funds in business is a must
to make it grow and achieve the desired expected profit
(together with the right planning and managing). Common mistakes
encountered by new entrepreneurs are wrong financing sources,
underestimated amount needed for capital and inflexible
financing types. These problems however can be prevented by
careful planning and analysis of the various factors involved in
starting a business.
In general, business people can choose from the two types of
financing, the debt and equity financing. Equity financing is
the type commonly used by small or growth stage entrepreneurs.
The sources for this type involves the center of influence that
trusts the entrepreneur, such as friends, relatives, family
members and other people interested in investing their money in
the business. However there are also capitalists who are ready
to take the risk of financing small businesses. These
capitalists may include financial institutions, authorized
government agencies or well-to-do individuals in society. There
are also venture capitalists that finance new business in the
industry to get equity. Businesses that have been in the
industry from three to five years are preferred by venture
capitalists. They have various methods to manage or deal with
the businesses that use their financing or invested money. They
can influence the decision making policies of the business in
the event its performance does not come up with the expected
result.
Another general type of financing is debt financing. This type
has varied sources which include Small Business Administration
Loans, commercial loans through banks and personal loans from
family, relatives and friends. The government recognizes the
importance of business in the economy of the country and that is
why they offer programs that can encourage the growth of small
enterprise by having their own financing agencies tp help a lot
of young business people and entrepreneurs. Debt financing
through banks is the traditional means to fund a business. The
banks act as a short term lender for the business person to have
the needed money to buy equipment and machineries necessary for
the business to flourish. The SBA or Small Business
Administration Loans are used in the case of local banks. The
loan that can be acquired can be from $5,000 to $2,000,000.
>From these two general types of financing branch the various
kinds of financing involved - not just in business but in other
fields as well. A few of which are piggyback financing, owner
financing and creative financing. Piggyback financing is used by
home buyers who want to avoid mortgage insurance which is
required when the mortgage is more than 80 percent of the
purchase price. Through piggyback financing, the borrower can
have two mortgages with costs that may vary. Owner financing
happens when the owner or seller of the property is the one
financing the buyer so in this case the owner acts as the bank.
The buyer in turn can pay the needed amount monthly or whatever
may be the agreement instead of going to the bank for financing.
Creative financing happens when the house buyer has a third
party lending institution which can be a bank or a loan agency.