Two Types of Business Financing

October 25, 2009 by Tyrone
Filed under: Entrepreneurship

In one of my earlier posts, if you want to start a business and you don’t know where to find the capital to finance it, I enumerated some of the ways to fund and finance a business.

In addition to seeking capital to finance your new business, you have to decide what form of financing you want. Will it be debt or equity financing, or a little of both?

Debt financing is money borrowed and repaid over a designated period, usually with interest. This is an attractive form of financing because the lender does not become an owner of your enterprise. Your obligation to the lender ends when the terms of the loan agreement are met. When negotiating a loan to finance your business, Kiyosaki said to remember the following:

Set the loan amount.
Specify a due date and payment schedule.
Establish the interest rate.
Discuss loan fees.
Make sure that prepayment of the loan will not carry a penalty.
Find out if any financial restrictions are placed on your loan.
Limit the amount of collateral, if it is required by the lender.
Try to avoid guaranteeing the loan personally. Many banks will require a personal guarantee by the business owner. Bear in mind that this makes you step outside the protection of a corporation and puts your personal assets at risk for repayment of the loan.

On the other hand, equity financing allows the business owner to exchange equity, or part ownership, in the company for capital funds. Unlike a loan, these funds do not have to be repaid. That may sound good, but it can be a disadvantage to lose partial control of your company. However, if your company is in need of additional financing, then you may have to bite the bullet and give away some equity.

Equity Financers have the right to be hands on in the business as a part owner of it. Whatever your loss is, he would be his loss and whatever your gains are, that would be his gains too. Therefore, team effort should be the key to become successful when engaging your business in equity financing. However, there might be risks of disputes on decision making among you as the business owner and your equity financers.

Whatever source of capital you find (if you’re fortunate enough to find it), and whichever type of financing you choose (if you have the luxury of choice), don’t proceed with the funding scheme until you’ve sought the help of a professional investment advisor and an attorney. It is the business owner’s job to make the business work, not to be an expert on all financial matters. Find good advisors and use them.

As an end, I would like to leave another Rich Dad Tip:

“When you move into the B quadrant, you change from an independent operator to a team player.”

Source: Robert Kiyosaki’s Coaching Program

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Comments

5 Comments on Two Types of Business Financing

jayl on Sun, 25th Oct 2009 9:19 pm

Hey Tyrone, great blog here. I love the new header. hows the payout for your ads? you must have a killer paycheck every month keep it up man. talk soon.

jayl

[Reply]

Tyrone Reply:
October 26th, 2009 at 6:42 am

Hi Jayl. Thanks, Jehz developed the logo. The payout? It’s not that “killer” as you have mentioned. Anyway, thanks for the visit.

[Reply]

Extreme John on Mon, 26th Oct 2009 7:29 am

I am interested in Angel investors as an additional business financing option, from what I understand there are a few good opportunities out there.

[Reply]

Tyrone Reply:
October 26th, 2009 at 8:09 am

Hi John, I think that Angel investors is one of the best example of equity financing. You just need to have a wonderful presentation to them and if they got interested, you’ll instantly get a business mentor aside from the funds that they would be more than willing to pour in exchange of an equity to your business.

[Reply]

Hire Service Professionals on Thu, 29th Oct 2009 7:01 pm