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Business financing

Among the basic financial tools that all business owners should consider is one or two business credit cards. If you pay in full each month, consider rewards cards that earn you cash back or other perks. If you’ll carry a balance, a 0% APR card may be a good choice. In addition to freeing up cash in an emergency, today’s business cards can provide a wide range of business cash management tools. See what your employees are buying, categorize spending for better budgeting, and use the reporting perks to make tax-time a breeze! With rewards ranging from airline tickets to statement credits to cold, hard cash, there’s likely to be a couple of cards that can help you squeeze a bit more out of your spending. Just be sure you keep your cards paid on-time and shop around to get the best annual fees and bonus offers for new card accounts.

Business Financing

Business financing is just it what it sounds like: the activity of funding the many aspects of a business, whether the funding be for starting a business, running it, or expanding it. Regardless of the size or type of business, there are fundamental questions involving financing that must be addressed.

For example, most businesses purchase a variety of items, such as buildings, machinery, or office furniture and equipment, that are intended to be useful for a long time. Such items are called long-term investments. Any business making long-term investments must carefully consider what those investments will be, how much they will cost, and how much they will hold their value over time. Just as important is the question of where to get the money needed to pay for them.

When a business is just starting, it typically borrows money from banks or other financial institutions, or it brings in additional individuals or institutions (that is, investors) to share ownership in the business in order to procure the initial capital it needs to cover the costs of building a new business. Capital is the term given to the money or other things of worth that are needed to produce goods or services. Capital can take the form of human beings, physical goods, or some means of financial exchange. Examples of capital are skilled labor, factories, office space, tools, machinery, and money.

When a businesses is up and running and managing the everyday financial operations, it may likewise turn to banks and investors for financing, but it typically relies on its customers for generating the money needed to finance the business. If the business is profitable and the company saves some of the money it makes from commercial activity, it may use that money to make new investments that will further expand its business. There are many different methods businesses use to acquire the financing they need to fund large projects and to improve their profitability.

When Did It Begin

Recorded instances of business financing date back to ancient times when wealthy Greeks arranged loans to shipping concerns that needed financing to transport freight. Greek lenders also funded miners and erectors of public buildings. In the Middle Ages Jewish merchants living in Italy loaned money to Christian Italian farmers. This practice established merchants in Europe as the main source of loans for farms and businesses and originated the concept of the “merchant bank.”

In 1781 the first commercial bank was established in the United States. Named the Bank of North America, it extended short-term loans to merchants who then passed them on to wholesalers of imported goods. The wholesalers, in turn, extended loans to retailers, often country stores and independent peddlers.

Another step in the development of business financing in the United States was taken in 1904, when the American banker A.P. Giannini (1870–1949; later to be nicknamed “America’s banker,”) opened the Bank of Italy in San Francisco in 1904. Immigrants who sought to borrow money to start businesses but had been turned down because they had no established wealth were supported by the Bank of Italy, which became the Bank of America in 1930. California industry and agriculture and Hollywood filmmaking were among the many interests supported by Giannini’s financing enterprise.

The Small Business Investment Act of 1958 established ways to make venture capital (funds from investors seeking to share ownership in new businesses) and long-term loans available to small, independent businesses in the United States. This program was the first to give small American businesses the financing they needed to start, maintain, and expand their operations.

What Is Mezzanine Capital?

Put yourself in the position of the lender for a moment. The lender is looking for the best value for its money relative to the least amount of risk. The problem with debt financing is that the lender does not share in the business’s success. All it gets is its money back with interest while taking on the risk of default. That interest rate will not provide an impressive return by investment standards. It will probably offer single-digit returns.

Mezzanine capital often combines the best features of equity and debt financing. Although there is no set structure for this type of business financing, debt capital often gives the lending institution the right to convert the loan to an equity interest in the company if you do not repay the loan on time or in full.

Advantages of Mezzanine Capital

Disadvantages of Mezzanine Capital

Off-balance balance financing is good for one-time large purposes, allowing a business to create a special purpose vehicle (SPV) that carries the expense on its balance sheet, making the business seem less in debt.

Determining how much business financing you need

A lender may also ask for a detailed list of why you need the funding and how it will be used. A lender may also ask for an explanation of why you need the funding and how it will be used. If this information is requested. Are you seeking funds for expansion? Are you refinancing a loan? Are you purchasing assets in anticipation of a busy season?

While it’s tempting to seek as much money as you can get your hands on, you only want to ask for as much as you need. Create a detailed list of the items you’ll purchase and the estimated cost. Will you be hiring employees? Document the projected cost to hire and how much the employee will be paid. Are you purchasing equipment? Research what equipment and an average cost to acquire that equipment. Figuring out how much you need—and how long of a repayment term you need—will be easier after you’ve updated your financial projections to estimate how much you need and when you’ll be able to pay it back.

Business financing basics: Debt vs. Equity

Broadly speaking, funding your small business falls into two categories: debt and equity. Financing through debt comes in the form of a business loan. Loans may be secured by assets, which means a lender can take assets if the loan isn’t paid back, or unsecured, which means there is no specific collateral pledged for the loan.

What is the most common form of financing for a small business?

How do I qualify for a small business loan?

Every lender’s eligibility criteria is different but it will almost certainly include revenues or cash flow, time in business, industry and/or credit scores. If one of these factors is weak, others should be strong. And certain types of financing require specific qualifications. For example, it is very hard to get a bank or SBA loan with bad credit. But if your business revenues are strong, you may be able to get a business cash advance even with poor credit scores.

Can you get government funding for your business?

Can you fund your small business with no money?

What is the best way to finance a business?

There is no single option that is best for all business owners. Bank loans tend to carry the lowest interest rates, but they can be hard to qualify for. Microloans often carry attractive terms for businesses that have trouble getting financing, but loan amounts are smaller.

Nav can help your business get financing by connecting you to financing options based on your qualifications. Nav’s marketplace will sort and match over 100 financing options for your business so you can apply with confidence. It’s simple, and you can sign up for free without impacting your credit score.