Understanding Small Business Finance

If you are an entrepreneur, then you know that there is always a need for small business finance to keep things going. Being able to get the money that is needed for your business means that you need to make several financial and non-financial considerations.

Firstly, before you search for funding for your business, it is important to know what type of financing required. Would the business need debt financing (a loan for running your business) or equity financing (money that is taken from savings or investors)?

Small business finance through debt financing means taking loans from credit unions, banks and other traditional financial institutions. Among the loans that are available are short-term loans which must be repaid, with interest, within a specific period of time. Such loans may be termed as demand loans as the lender can call in the loan for repayment any time. Small business finance longer debt loans are normally used for financing assets like renovations or investments in equipment.

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The Small Business Financing Crisis

The current small business credit crunch is getting much attention and rightly so. We know very little about the overall small business universe because it is so huge and diverse. Most discussions about this topic focus on credit and lending, but the issue is much more complex than that. A more broad-based discussion is necessary to understand the full extent of the current crisis. The crisis encompasses both types of financing, debt and equity.

Personal Wealth

In good times or bad the top source of small business capital is the personal wealth of the owner. Even beyond startup, owners often tap into their personal wealth like a line of credit, on an ongoing basis. If available, personal wealth is easier to access than other forms of financing and may be the only source available. The primary sources of personal wealth are typically real estate and retirement accounts. Since 2008 both of these sources have taken a huge hit, so the amount of personal wealth available has plummeted. Most owners are experiencing the worst economic times in their lifetime. So even if they have personal wealth available, they are less likely to invest it in their businesses. Instead, they are cutting back or forgoing expansion.

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Options For Business Financing

Finding business financing is especially important to small and medium companies all around the world who are mainly supported by financial institutions.

Business financing is what most medium and small entrepreneurs are concerned about. The reason for this is the fact that these types of businesses are important in the new world of globalized commerce. Competition is increasing and banks are more reluctant to give the so much needed Commercial Loans.

Here we present you a set of options if you are looking for commercial financing.

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Working Capital Business Financing Sources

Working Capital business financing is never a question of why – it’s just simply a matter of when! Working capital and cash flow are of course the heart of every business. The challenges of obtaining that financing become a question of time.

Perhaps you need cash for for your regular ongoing business cycle – that’s the simple one – you buy inventory, your produce things, you sell, bill and collect. In a perfect world your suppliers give you unlimited time to pay, and unlimited credit limits. And of course your customers pay you in exactly 30 days. Guess what? It’s not a perfect world!

If you are a traditionally financed firm you have access to bank capital for revolving credit lines based on your business needs. But for a growing number of Canadian firms that access to traditional bank capital is not available. Those scenarios require a special expertise in identifying sources of business financing that work for you. The solutions actually are quite numerous – its becomes a questions of which solution works for your firm, what are the costs involved, and does the solution fit within your business model.

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Choosing and Gaining Your Business Finance

When it comes to business start up every new business needs that bit of extra cash for such aspects as equipment, marketing costs and getting the workplace established. As most of us don’t have a few extra thousand pounds lying around we have to turn to outside help in order to gain this extra money that is needed to get your new business venture off the ground. This extra cash is needed for your business before it even makes its first sale.

Thankfully there are a number of finance options open to you, the important decision that you need to make is which finance option you are going to use. You need to make sure that the business start-up finance that you decide on is best for your companies needs. Always remember when deciding on your funding that cashflow is what enables a business to survive and is a primary indicator of the health of a business. Businesses can however survive for a short time without sales or profit but without cash it will die. This is why when it comes to your business it is highly important that you keep an eye on what cash is going into your business and what cash is coming out. You need to manage your cashflow efficiently if you want your business to make a profit and succeed, to do this you need to make a cashflow forecast. This is an invaluable business tool if it is used effectively. By having a regular review of your cashflow situation you will be able to identify when problems are likely to occur so that you can sort them out in advance it will mean that you can identify any potential cash shortfalls and allows you to take the appropriate action. Also you need to ensure that you have sufficient cashflow before you take on any major financial commitments.

Each type of finance that is available for businesses are designed to meet different business needs. Finance is a term that covers a huge spectrum of different fields including asset finance/leasing, overdrafts, loans, mezzanine, equity and grants. Before you decide on which of these forms of finance is right for you it is important that you have an accurate idea of what your financial needs are then you will be able to calculate the amount of finance that you will need to cover your initial start-up costs. When thinking about your initial start-up costs it is a good idea to remember that you will also have to keep in mind your start-up running expenses as you will have no profit to begin with to cover these. It is probably a good idea to make sure that you have enough capital for about six months of business.

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