There are two main types of business financing:
a) Equity financing
b) Debt financing
Equity financing includes exchanging money for a share of a business.
Equity finance also includes:
* Money obtained from allowing other people to invest in your company
* The money you contribute to the business
* The money that the business makes and retains
Debt financing is borrowing money that will be repaid over a period of time with interest.
The advantage of debt financing is that it can be either short term or long term.
The main forms of debt financing are:
* Equipment finance which includes leasing and hire purchase of equipment. Leasing equipment rather then buying it can provide a number of advantages.
* Long Term – Examples include term loans, leasing and secured loans.
* Trade Finance – Sources include banks and on occasion, government authorities.
* Working capital – Sources include bank overdrafts and inventory financing loans.
If in doubt about balancing of debt and equity levels in your business, seek the help of an experienced accountant or financial advisor.
Too little business investment by a business owner may be an indication of lack of drive and commitment.
Too much debt in comparison to equity may create a credit rating issue and create financial strain for future business decision-making.
At the end of the day, finding the right balance as a business owner is part of smart financial and business planning.
