There are two main types of financing for a business, debt or equity financing. Debt financing tends to be the type of financing you receive from a traditional bank loan and equity financing tends to be financing you receive from venture capital into your business from outside investors. The benefit of debt financing is that it is finite and you will pay down the debt over time to a zero sum balance without any further obligation to the lender. The down stroke to debt financing is that traditional lenders will take a hard look at your business including how long it has been in existence, income from operation, expenses and will require hard assets for collateral for the loan. Additionally, lenders will most certainly want you (and any other principals of the organization) to personally guarantee repayments of the loan. Another disadvantage of debt financing is that your organization will be burdened with some other type of regular payment (usually a monthly payment) depending on the terms and conditions of the financing and this can absorb critical cash flow, especially with small business.
The benefit of equity financing or venture capital is that you will be receiving money in exchange for equity in your business in the form of stock or some other form of equity like percentage of income or gross/net sales. A primary benefit of this type of financing is that typically there is no monthly payment requirement to investors. Instead, you are giving up ownership interest, most often, permanently.
Traditional lenders, banks for example, will look at your business much differently than venture capitalist. Bankers want a zero-risk or near-zero risk position when they provide financing and will rely almost completely on the operating economics of the business with little regard for “potential future growth”. They want to see strong cash flow backed up by hard assets before they do a deal—the ingredients that most small business lack or they wouldn’t be seeking financing, right? Venture capitalist, on the other hand, tend to consider the management team and the potential future growth of the business more heavily than actual operating numbers, especially for small business with large potential but few sales and little or no operating history. Although these two lender types vary in their approach to analyzing a business for funding, you can be sure that careful scrutiny of you business will be conducted…
Besides the actual operating economics and pro forma analysis, both types of lenders will look closely at two particular documents: 1. Your business plan. 2. Your bank or loan request package. These two documents, if assembled correctly, can make the difference between success and failure when dealing with either lender type.
There are plenty of free SBA related materials that tell you how to create blue-chip, boiler plate business plans but they tend to be written for perfect businesses and not the average Joe who is less than picture perfect. If you are seeking some type of financing for your business I strongly suggest that you visit our site and check out our business e-books. We have several that cover a variety of topics and there are specifically two that will be a real treasure for you to own. One is called Power Planning (a powerful report on writing a wide variety of business plans) and How To Raise Money For You Business (teaches you how to assemble professional loan requests packages). They are priced at $5 each and can be worth millions in the hands of the right person. I am not trying to hype product, I am simply giving you a heads up.
The secrets to getting financing from either type of lender is a closely held secret by financial and business brokers for a number of reasons. Chief among them is it forces people like you to do business with them and they earn commissions. The SBA materials, while good, do not have the street savvy to get the job done in most cases. The proof is in the pudding—what has the SBA ever done for you? The SBA is just another government back bureaucratic nightmare for most. We also have some links for venture capital firms in our business links area located on our site on the Smart Link Zone page—it’s all-free.
Give it some thought…. Your future may depend on it.
To your success! Copyright © 2006 James W. Hart, IV All Rights reserved
By: Jim Hart
Archive for September 10th, 2009
Home Equity Consolidation
Sep 10
The Consumer Debt Trap
A recent survey determined the average American family has consumer debt balances of over $10,000. Once a debtor gets into the position of carrying credit card balances over from month to month it becomes very difficult to pay the balance down to zero because of high interest finance charges and carrying fees.
Utilizing Home Equity Consolidation to Lower Debts
There are many uses of a home equity loan. Many home owners borrow against their equity for home improvements, college tuition, even vacations. The loan money can be used for virtually anything. One of the best uses for the loan is to pay off high interest credit card and other consumer debt.
Benefits of an Equity Debt Consolidation Loan
One strategy for getting credit card debt paid off is applying for a real estate equity consolidation loan. This approach will not miraculously remove debt however the loan will allow the debt to be paid off with lower monthly debt payments. Credit card interest rates charged on unpaid balances are high and getting higher. Additionally, these rates most often fluctuate with the prime bank rate making it impossible to work out a longer range budget to pay the balance off. Once consolidated into a home equity loan the payment and interest rate can be fixed. Also, there will be an immediate positive impact on monthly cash flow as the one new equity loan payment will be lower than the combined payments of the debt paid off. With only one debt payment one can plan to be debt free in a few years.
The Disadvantages of Home Equity Loans
Home equity consolidation can be very useful. However, it is always important to use loans prudently and borrow only what can comfortably be paid back. All loans create another monthly bill to pay. If the funds are used to pay off credit card balances then discontinuing credit purchases to avoid piling up more debt is mandatory. Increasing total debt by not curtailing charges on credit will create a deeper and more serious financial crisis. If a home equity loan used for debt consolidation results in financial over-extension then the consequences could very well end up in foreclosure because now the debt is collateralized whereas consumer debt is not.
Also, there are other disadvantages one should be aware of. First of all, although the interest rate charges are lower than the debt paid off with the loan, the term of the loan is generally for years – much longer than someone who could pay off consumer debt without a loan would carry a balance. This means there will be many more debt payments with interest on each payment adding up to more total interest than if the debtor just “tightened the belt” and paid off their consumer and card debt within months rather than years.
So if the new home equity consolidation loan monthly payment is within the budget, has lower interest rate finance charges and still does not leverage the home more than 80% accounting for all mortgage debt, this debt consolidation strategy can be a good way to refinance high interest credit card and consumer debt.
By: Mason Smith
The longer you live in your home the more equity you are building up in it. Home equity can be very important and can be a good buffer if an emergency comes along because you can obtain an equity loan depending on how much equity you have built up.
If you are in need of an equity loan what will happen is first of all the lending institution will send out an appraiser to set a value on your home and then based on this you may qualify for a percentage of that amount for your loan. This will be your loan ratio.
Quite often, you hear the term market value and what this refers to is the price that if someone wanted to buy your home what would they be willing to pay for it at this particular time. That does not necessarily mean that that is the sale price of your home now because it can vary.
Once you know these facts then it is a little easier to get a decision made about your home equity loan. It is a wise choice not to go and take out a loan against your equity unless you absolutely have to. You want to consider the future when it comes time to sell your home.
The more equity you have built up the more money you will end up with in your pocket after you have made your sale. As we mentioned though there are times that it just is not avoidable.
You need to shop around for your home equity loan the same as you did for your first mortgage. Again, there are variable rates and quite often for the home loans, you get a good rates because you have the collateral in your home.
Some of the reasons you might want to use your home equity is perhaps to pay off some debts that are at a high interest rate and by doing this at a lower interest rate than you are going to pay off the principal much faster.
Another reason for obtaining and utilizing your home equity by way of a loan is for home improvements. This is a potentially good investment because quite often most updates and remodeling can add value to your home. Another good use for home equity is to put the kids through school or even for starting a business. Whatever your reasons for choosing to use your home-equity make sure that they are good ones and think about your future as well.
By: Thomas B. Chuong