Funding for a business results from two primary sources; equity or debt.
Equity is the owner's or stockholders original investment and, as such, represents the owner's cash contribution to the business ( from savings).
This funding can be obtained from various sources, such as friends, or family.
Equity funding is dollars, which remain in the business and have no set repayment schedule for disbursement to investors.
Equity requirements for a new business fall in the range of twenty-five to fifty percent of the total projected cost of the business start-up. This means that owners may be required to provide up to one-half of the funds needed to open the business.
A loan or debt is the other funding source common to business financing..
These are funds obtained from a third party source, generally a commercial bank, having a defined repayment schedule which stipulates both principal and interest.
Loans can either be unsecured or secured.
Unsecured loans are based solely on the borrower's financial strength, without pledging of assets (collateral); while secured loans, also based on financial strength, require pledging assets as collateral for the loan.
Secured loans are the common method used by third party financing sources.
Commercial banks offer loans with varying interest rates and repayment terms.
Interest rates are generally based on the New York banks' prime interest rate given to their most creditworthy customers, with a percentage add-on for the perceived degree of risk of each individual lending situation (prime plus 2%).
Repayment terms will vary with the useful life of the asset financed.
Working capital loans (used to finance inventory and accounts receivable) range from three to five years, equipment loans five to seven years, and fixed assets (land and buildings) twelve to fifteen years.
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Posted by Lionne Club on 3/4/08 2:34 PM
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