Article provided by Mercantile Bank
Entrepreneurs looking for funding could feel overwhelmed by the different options available, and may wonder – understandably – which financing options to use for their business.
A personal banker that knows your company should be able to tailor a funding solution to suit your businesses’ unique requirements, but it would be wise for entrepreneurs to familiarise themselves with the different options available.
A suite of borrowing products usually includes working capital facilities (overdrafts), asset finance, and business loans.
Working capital facilities
The intention of working capital facilities is to help a business to finance its day-to-day activities. The most common example of this type of borrowing is an overdraft.
This type of borrowing is important for businesses to help them finance their daily operations – their short-term operational needs – and help to manage their cash flow in order to pay amongst others employees, rent, and suppliers when these are due.
These are financing options for your business to acquire long term assets such as vehicles, machinery, and equipment.
With asset finance, you own the asset and keep it on your balance sheet by paying monthly instalments over a fixed term.
This type of finance is useful for businesses who are looking to rent assets, typically “commodity” items, like office equipment (photocopiers, etc.) and computer equipment, with a shorter lifespan compared to machinery and vehicles.
Rental agreements can be specifically designed and have varying periods attached to them, ranging from 24 to 60 months.
When a business wants to buy the property it is operating from, property finance is the option.
Banks prefer and are more likely to lend an entrepreneur money (on better terms) if the property is owner-occupied. The benefit of this is that the entrepreneur has a vested interest in the property and will make sure it is maintained and has its pulse on what is going on at the property.
An entrepreneur that owns their own property can also have multiple tenants and thereby have an additional source of income in the form of monthly rental income.
In the case of business or term loans, the entrepreneur borrows money, normally for a fixed period of time, and pays it back with interest at a determined monthly amount.
Usually, collateral is required for these types of loans, due to it being bigger and longer term loans in most cases. Examples for using a term loan includes when one partner would like to buy out other partners in the business.
Entrepreneurs should be aware of the different financing options available and what it means for their business in terms of, amongst others, cash flow and ownership of assets, but it is always a good idea to have a dedicated banker that understands your business and provides the right option for your business to grow.