Reasons for Business Financing

Borrowing money is not only expensive for a company; it also represents an additional business risk. In addition to the normal risks associated with building new facilities or launching new products, borrowing money actually introduces another level of management to an operation. And the lender – who, in essence, is the borrower's new partner – may not necessarily be as patient as would sometimes be desired, particularly if plans or projections don't go as expected. The lender may have higher expectations for the financial results than the company's management or the market can deliver within a given frame of time.

Any organization seeking financing with borrowed funds, therefore, should carefully contemplate all the implications that incurring such debt would entail, including the potential risk of not succeeding. Rather than maximizing the available leverage, it's often wise for a business to instead consider the advantages of minimizing the level of borrowed funds in order to reduce the company's exposure to default.

When seeking funding, the business owner must be able to define specifically why the financing is needed and exactly what impact it will have on the enterprise. Failure to articulate this information often reflects to the lender unprepared or inadequate management, or the existence of another agenda in which the lender would be hesitant to participate. Furthermore, business owners also frequently waste precious time seeking to obtain financing from inappropriate lenders because they failed to define the kind of money that's needed. Understanding that certain lenders service specific types of loans can make the search for funding quicker, easier, and more successful. Generally speaking, there are four major reasons that businesses borrow money, each requiring its own specific underwriting and repayment terms:

Real Estate Loans - These loans are the most popular for the majority of small business lenders, and can be used for acquisition, construction, or improvement. They're typically long-term loans that, on the average, have the safest collateral available to lenders.

Start-Up Loans - Start-up financing is used by some borrowers to supplement their own equity contributions when purchasing an existing operation or launching a new business. Most lenders require the borrower to have strong collateral assets or other compensating factors to justify the risks involved with this kind of financing. Start-up funding is generally hard to obtain if the borrower can't supply a substantial contribution of personal capital, typically a minimum of 25- to 30 percent of the total financing that's needed.

Equipment Loans - These are intermediate-term loans that provide funding to purchase equipment assets, usually being repaid over a term no longer than the expected useful life of the equipment being financed. Loans for equipment usually offer a ten-year amortization of principal and interest, although some may be amortized for up to fifteen years for certain major equipment assets.

Working Capital LoansWorking capital is defined as money used by a business as operating cash to produce profitable revenues. If the borrower can provide assets as collateral, other kinds of loans can sometimes include funds for working capital. Loans for this purpose are essentially a substitute for cash.

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