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Funding Sources
: Conventional Methods to Raise Money
The key is
gathering and understanding options, and then making wise selections. Here is a
primer of the options that exist.
1.Equipment
Financing, Leasing, or other Supplier Financing
This financing is
for specific purchases of durable assets, often supported or arranged by the
seller of the equipment. This financing is the easiest to arrange, but will not
address your needs for working capital or other growth. The cost is usually
limited to either an explicit or an implied interest rate that is imbedded in
the loan or lease payments.
In some industries,
financing can be obtained from key suppliers. These deals exchange money for
your loyalty. They can be inexpensive financing so long as the cost of this
loyalty is not too high. Insist that suppler financing be contingent on the
supplier’s performance, and that other terms that are not too stringent. For
example, if you make commitments regarding exclusivity and the supplier is
unable to make timely deliveries, be sure that you have back-up options.
2.Commercial
Bank Debt
Until your company
is quite large (in which case this article would have probably already lost your
interest), this financing will be secured by all of your business assets, and a
personal guarantee from the owners. Your home or other personal assets will
further secure the personal guarantee. The loan cost is simply the interest
rate, which will usually be a few percentage points above a short-term index
rate (such as the prime rate). Because these loans either have a relatively
short term of a few years, or must be repaid at least once each year, they are
best used for working capital rather than long-term growth.
3.Asset-based
lenders (including factors)
These loans are
usually secured by a certain type of asset, such as accounts receivable. These
lenders will often lend more money against certain assets than will a commercial
bank, but this comes at a higher interest rate, higher other costs, and higher
routine monitoring of your activities.
When dealing with
asset-based lenders, consider all costs. Fees are not standard between financing
institutions, and can add considerably to the cost of funds. Understand the
details and do the math.
For 4 to 6 below
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4.Subordinated
Debt (also called Mezzanine Financing)
5.Equity
Financing
6."Vulture capitalists".
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