Money is of extreme importance nowadays. Almost
everything that we do involves money. The same is true
if one wants to venture into business or buy a home
which is one of the basic needs for survival. Financing
or supplying of funds in business is a must to make it
grow and achieve the desired expected profit (together
with the right planning and managing). Common mistakes
encountered by new entrepreneurs are wrong financing
sources, underestimated amount needed for capital and
inflexible financing types. These problems however can
be prevented by careful planning and analysis of the
various factors involved in starting a business.
In general, business people can choose from the two
types of financing, the debt and equity financing.
Equity financing is the type commonly used by small or
growth stage entrepreneurs. The sources for this type
involves the center of influence that trusts the
entrepreneur, such as friends, relatives, family
members and other people interested in investing their
money in the business. However there are also
capitalists who are ready to take the risk of financing
small businesses. These capitalists may include
financial institutions, authorized government agencies
or well-to-do individuals in society. There are also
venture capitalists that finance new business in the
industry to get equity. Businesses that have been in
the industry from three to five years are preferred by
venture capitalists. They have various methods to
manage or deal with the businesses that use their
financing or invested money. They can influence the
decision making policies of the business in the event
its performance does not come up with the expected
result.
Another general type of financing is debt financing.
This type has varied sources which include Small
Business Administration Loans, commercial loans through
banks and personal loans from family, relatives and
friends. The government recognizes the importance of
business in the economy of the country and that is why
they offer programs that can encourage the growth of
small enterprise by having their own financing agencies
tp help a lot of young business people and
entrepreneurs. Debt financing through banks is the
traditional means to fund a business. The banks act as
a short term lender for the business person to have the
needed money to buy equipment and machineries necessary
for the business to flourish. The SBA or Small Business
Administration Loans are used in the case of local
banks. The loan that can be acquired can be from $5,000
to $2,000,000.
From these two general types of financing branch the
various kinds of financing involved – not just in
business but in other fields as well. A few of which
are piggyback financing, owner financing and creative
financing. Piggyback financing is used by home buyers
who want to avoid mortgage insurance which is required
when the mortgage is more than 80 percent of the
purchase price. Through piggyback financing, the
borrower can have two mortgages with costs that may
vary. Owner financing happens when the owner or seller
of the property is the one financing the buyer so in
this case the owner acts as the bank. The buyer in turn
can pay the needed amount monthly or whatever may be
the agreement instead of going to the bank for
financing. Creative financing happens when the house
buyer has a third party lending institution which can
be a bank or a loan agency.
