Business

What is Business Financing and its Types

Business Financing

The Business Financing Mechanism “allows a company to have the necessary financial resources to meet its business creation, development, positioning, and consolidation objectives. ”

What is Financing?

Financing is one of the essential points when starting any business project or when you want to grow once formed. We define it as how the company obtains resources and money to carry out different tasks.  A lack of initial planning can lead to the ruin of a company.

What is the Importance of Financing?

Financing is the fuel on which a company runs. It is a support that helps the company continue its growth and expansion and achieve its short and long term objectives. Financing is equivalent to receiving resources returned at a specific rate at the end of the financial cycle. The interest to be paid for the credit discharging from the utilities’ taxes.

In times of the covid-19 pandemic, with commercial limitations and global confinement, many companies resorted to the help of external capital to recover liquidity. And also to resume growth plans.

What are the Financing Needs of a Company?

It is the capture of external resources that a company requires to execute its projects. However, for most businesses, the primary source of financing comes from savings and other forms of personal resources.

Every company needs resources to be able to sustain its growth. Discover the financing option through Arindam’s and how we can help your company grow. When requesting financing, depending on our business activity or personal needs, financing may be an efficient instrument to carry out our productive project.

Types of Business Financing

Below we will clarify the different types of financing for which you can opt. It will help us know when it is more convenient to go to one kind or another. Therefore, it is crucial that you see them well and their advantages and disadvantages so as not to take any surprises later.

1. Friends, Family, and Fools

“Friends, Family and Fools” is the first source of financing since it is used for the company’s constitution. When an entrepreneur starts his business thanks to his savings and the help of his family and friends, it is what we know as the closest capital, and it is used mainly to shape the project and make it go from a simple idea to something tangible.

2. Seed or Startup Capital

Seed capital is a type of share offering in which an investor acquires a part of a business or company, investing in its early phase.

The seed capital implies a higher risk for the investor than the more traditional venture capital financing. The said investor cannot see any business reality in operation to evaluate its financing.

3. Crowdfunding

This form of funding is preferred for companies, startups, and projects that contribute to the common good (with or without profit) or whose idea is innovative enough to conquer a more general public and make them participate in it.

And it is that it is a cooperation between different people of a network that, through the Internet (fundamentally), gathers resources and money to help the entrepreneur develop his project.

Of course, anyone can participate in crowdfunding, and there are different pages to channel these actions, but it is essential to know that you become an investor in the project in no case.

4. Public Funds

They are used to make business models and project development; that is when it is more advanced than a simple idea.

Within this classification, we can subdivide it into two types: period grants, which are those that must not be repaid and are usually intended to finance a specific item within the project; and public loans that, like any bank loan, must be repaid, but with more advantageous conditions than what could be chosen through private entities.

5. Business Angels

Companies that are already operating receive this type of contribution because, due to their high innovative content or potential development, they attract the support of these investors. Generally, “angel” investors are independent or associated with a club.

6. Bank Financing

Companies can resort to bank financing in directive to have flow in the daily operation of the business or finance the acquisition of assets necessary for the operation of the project. There are many financial instruments, but we could classify them into two large groups.

7. Alternative Financing

Alternative financing is a fascinating instrument for companies in crisis or that need to expand but have complete bank credit lines.

In this type of financing, Tedesco is undoubtedly one of the companies with the best reputation in Spain.

8. Capital-Risk

Also known as “Venture Investment,” it is used once the business has a certain level of growth since it is managed by a fund that invests more significant amounts.

This way, the solutions provider for business projects and risk and returns are shared.

9. Private Equity

The ” private equity ” is a fund for large companies and use to increase the business or internationalisation. Offers capital in exchange for shares that the company grants. In addition to money, it contributes other resources, such as contacts, best practices, administration, etc.

10. Own Financing vs External Financing

Own financing is when the partners will give the resources themselves based on what the company already has internally.

Without it, the dependence on third parties is total, and it will be challenging to carry out the project.

External financing is all the rest, which comes from external agents.

11. Short, Medium, and Long Term Financing

Within the different types of financing, we find different periods in which we can return the financed amount.

Short-term financing: This type of financing is consider when you want to repay the financed amount in less than a year.

Within this category are well-known formulas such as promissory note discounts, advance invoices, confirming, guarantees, etc.

Medium and long-term financing: These financing formulas are designe to be amortised over the long term. Within these are renting, long-term investments, etc.

12. Non-refundable Financing

Special mention deserves non-refundable loans.

It is not money that obtains without further ado; instead, it requires a justification and analysis of what the financing intended. We find this type of financing in two main entities: governments that would be the most prominent financiers.

13. Cost of Financing

Once the sources of financing and the states in which one or the other are more appropriate have been classified and defined.

The basic rule will be that the project’s performance is more significant than its cost of financing.

which will add value to the company and benefit all those parts of it.

Conclusion

This info will make it easier for us to decide the sources of financing with the lowest cost to generate.

That plus every company requires when starting a new project.

Also Read: Eight Ways to Create a Digital Marketing Agency.

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