All businesses no matter what type it may be require business loans. Financing a startup business is essential in order to support operations and ramp up your company’s profitability. There are various sources to seriously consider for business financing especially for new companies. First and foremost, determine the approximate amount of money you need to initialize your business plans.
2 Main Sources of Business Loans
There are two major sources of business financing namely debt and equity. Business owners that qualify may also have other optional sources such as government grants and incentives from community or industrial activities.
The main concept of equity financing is that a portion of the business ownership is exchanged for financial investment. The investor shares in the profits of the company through ownership stake from the equity investment.Based on the technical term of this source of financing, the equity basically involves permanent investment.
Therefore, the borrower or the company does not repay the business loan at a specified date.
Types of Equity Stake
The first type of equity stake is membership units. This is the form of equity stake that is used in Limited Liability Company or LLC. The second type of equity stake is the preferred or common stock which is the one in corporations.
2. Debt Financing
One of the main sources of business loans is debt financing. This particular source involves the activity of borrowing funds mainly from creditors. Unlike equity financing, there is a stipulation that the borrowed amount is to be repaid plus the agreed upon interest rate. Borrowers are required to comply with the repayment of the funds and interest at a specified due date. Creditors of business loans benefit from debt financing through the interest imposed on the borrowed amount to the business owner.
Types of Debt Financing
The 2 general types of debt financing are secured and unsecured. Secured debts require collateral or the valuable asset that is attached to the compliance with the loan.
Collateral satisfies the loan in case the borrower defaults on the amount. Unsecured debts, on the other hand, do not have collateral. Therefore, the lender is in a less secure position as to the repayment in case the borrower defaults on the loan.