Equity Financing and Debt Financing example

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Equity Financing and Debt Financing

Generally, small businesses often need to raise additional funds. This is especially true for those companies that are in the initial stage of development. However, after starting the search for money, you can discover the most unpleasant news – just for “newbies” in business, raising funds is a very problematic issue. Many banks abroad have tightened the lending standards, and venture capitalists are still not recovering from their losses from the recent crises. Economic agents often ask themselves what kind of business financing should they choose. In order to answer this question, it is necessary to determine the issue of risks and benefits.

Borrowed financing

Loan financing includes all those consumer loans that we so easily use to solve our financial problems. The essence of the process is simple – economic agents take a loan from a bank, an individual or another lender, and promise to return it with interest. For business, debt financing works in exactly the same way. As a business owner, you can apply to a bank or a private lender, or ask someone from your family or friends to lend you money. However, do not hope that “they” lend you money for nothing – interest will be demanded. Although this also looks quite logical on the background of constant inflation and depreciation of funds. Since creditors, unlike investors, do not participate in the company's profits, they receive their money back with interest on a mandatory basis, regardless of whether the enterprise receives profit or not. The potential creditor include banks, trust companies (trust funds), private investors, commercial finance companies, credit unions. In addition, in different countries there are specialized organizations to deal with this issue. For example, in the Canadian province of Alberta, there are credit institutions such as Alberta Treasury Branches, The Financial Services Corporation for Agricultural Enterprises, AFCS (Agriculture Financial Services Corporation), Bank of Business Development of Canada (Business Development Bank of Canada) etc. As a small business owner or manager, you need to familiarize yourself with the creditors' requirements before deciding on the type and source of debt financing. When deciding on the type and source of debt financing, the following rule should be taken into account: Financing current operations (working capital) should be through short-term loans, and financing long-term non-current assets should be through long-term loans or a mortgage. Large acquisitions require foresight and careful planning. The fixed assets of the enterprise, such as land, buildings and equipment, are usually financed at the same time by the owner's equity provided by the owner (s) and loans for the provision of business conditions. This loan is given for a period of not less than one year and, usually, no more than 15 years. As collateral property is usually proposed, the acquisition of which is financed by this loan. The debt repayment schedule, as a rule, depends on the service life of the property. This type of debt financing is often called the financing of fixed assets. Lenders pay only a certain …

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