How to Fund a Business
There are 2 main types of debt structures that can be used to finance a business
1. Borrowing – lump sum cash payment for full ownership of asset or equipment
2. Leasing – monthly cash payments in return for using an asset or equipment
Borrowing
Borrowing involves using other people’s money for your business. In return Lenders want payment (interest) for the use of their money.
They also want:
• Confidence in the business and the borrower
• Assurance of a safe investment – risk is acceptable
• Tangible commitment from borrowers
Types of Borrowing
Short Term Loans: 12 - 24 months
• Trade Credit
• Overdrafts
• Bridging Finance
Long Term Loan: Fixed term borrowing 1 – 10 years. More appropriate in the purchase of fixed assets such as:
• Large equipment and assets
• Land and buildings
Standard Criteria for Borrowing Finance
Borrowing involves using OPM i.e. other people’s money for your business. Lenders want payment (interest) for the use of their money.
1. A comprehensive business plan
2. Some level of contribution
3. Good credit rating
4. Good security
Leasing
Alternative method to finance assets and equipments without an upfront capital cost.Leasing involves monthly payments in return for the use of equipment. These payments are tax deductible as long as the equipment or asset is used to earn income.Leasing provides flexibility and reduces the pressure on upfront capital requirement
Types of Leasing
• Finance Lease – long term contract with the option for the lessee (business) to purchase the equipment or
asset at the end of lease term
• Operating Lease – short term rental agreement, ideal for vehicles
• Sale and lease back – applies to properties, where it is sold to a property investor and then it is leased back
