You might know your business inside and out but lack the knowledge required to successfully fund your company. To keep from running your business into the ground before you even get it off the ground, it’s essential that you arm yourself with the right information. Learn some of the most frequently asked questions regarding business financing.
1. Question: How Do Businesses Typically Generate Financing?
Currently, there are two main methods for creating a sustainable flow of cash for a business: equity and standard loans. Besides traditional commercial loans from a bank, business owners can also borrow money from friends and family members. Business owners also have the option of selling equity in their business, which is a common choice for entrepreneurs who are just getting started. Both loans and equity have their advantages and disadvantages, so careful consideration and planning are required for both.
2. Question: What’s the Difference Between Regular Loans and Commercial Loans?
There are a variety of similarities that exist between personal loans and credit loans. With a business loan, you and your lender will work together to decide on the interest rate, the amount of the loan and how you’ll pay the loan back over time. You’re also likely to be required to put up some type of collateral for your business loan. For small business owners who are just getting started, this collateral is usually their personal property, so be prepared for this eventuality if you’re among this category. Otherwise, you can put up business equipment or property as a loan security.
3. Question: What Are the Repayment Options for Commercial Financing?
You’ll most likely have to pay back your loan on a monthly basis, which will go towards the interest and the principal of your loan. To give yourself a bit of leeway while you start generating a profit, you can opt to have a lower monthly payment during the initial period of your loan. Once that initial period is complete, you’ll have higher monthly installments to make up the difference. You should also be aware of the fact that you might have a balloon payment after your initial loan period. Business owners may also be able to structure loans so they’re paying more on the interest than they are the principal portion of the loans. In either case, you might want to stash some money every month so you’ll have some on hand for slower periods when you aren’t able to make your monthly payments, or when you’re hit with a balloon payment.
4. Question: What Are the Differences Between Traditional Commercial Loans and Equity?
With a standard loan, you’re simply borrowing money that will be paid back over time. With equity, you’re offering up an ownership interest in your company in exchange for funding. While you don’t have to pay equity back, you are giving up a percentage of control in your business and a portion of your profits. Before agreeing to an equity partnership, know that you might not like some of the changes investors make in your business, which can include terminating one of your founders.
5. Question: How Do I Sell Ownership?
With equity financing, a business owner first decides how to structure her or his business, such as a partnership, limited liability corporation (LLC) or sole proprietorship. The default form of executing an equity investment is a general partnership, which your investors may not prefer since they’ll become responsible for any liability and debts your business incurs. It’s much more common for equity ownership agreements to be established with limited liability.
Even with the above FAQ guide, you still might have several other questions bubbling in your mind. If you do, be sure to consult with a business law attorney for professional and trusted assistance.
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