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2.3 Know Your OptionsFour Types of Financing The two sources of funding (conventional and risk) can be further broken down into short-term and long-term financing. A growing company looking for financial help can consider four categories: short-term and long-term financing, from both conventional and risk lenders. And within each of these categories there are even more options. In your previous business experience, you've almost certainly tapped into one or more specific types of financing that fall into these four categories. Have you ever used a line of credit from your bank, for example? Then you've used conventional short-term financing. If you've leased a car, then you've used conventional long-term financing. Risk Capital Long-term Financing
Risk capital investors invest in equity shares and equity-related debt in relatively small or untried enterprises, thereby taking a risk that commercial lenders won't usually shoulder. Risk capital investors are rarely interested in inventions that need further research, development and engineering. These investors provide primarily equity financing, but they may also provide debt financing in the form of quasi-equity. Take a Closer Look ![]() Conventional Long-Term Financing
Capital assets or fixed assets are often bought through intermediate and long-term financing. Straightforward term loans, usually secured by the capital asset itself, are one example. Equipment vendors and leasing companies also provide financing through leasing arrangements. Lending institutions such as life insurance companies, commercial finance companies, pension funds, and federal and provincial government agencies provide longer financing on capital assets. Take a Closer Look ![]() Risk Capital Short-Term Financing
Like banks, commercial finance companies provide credit on working capital accounts such as accounts receivable and inventories. These lenders are more concerned with the quality of the underlying collateral than with the credit worthiness of the borrower. Because of their expertise with receivables and inventory-based loans, these lenders can frequently advance to the borrower a higher percentage against the collateral. Take a Closer Look ![]() Conventional Short-Term Financing
Conventional short-term financing is usually provided by commercial banks and is repaid through inventory turnover or by converting receivables to cash within the time frame of the loan. Your bank will lend your business money if it feels comfortable with the risk. Loans may be secured (backed by collateral) or unsecured (backed by the lender's confidence in you). Take a Closer Look ![]()
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Updated: 2005/07/12![]() |
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