Business finance is similar to personal or household finance, but has some important differences. For this reason, there are different products available for financing business needs.
Who is business finance for?
Business finance is only available to businesses, but the size and type of business doesn’t matter – there will be a suitable product available. The larger the business, and the longer it has been running, the more products will be available. Small businesses, especially newer ones, can be very volatile, and are therefore scrutinised very carefully before any loans are given, but that doesn’t mean they can’t benefit from the other products offered by banks and other financial institutions.
Who can apply for business finance?
Any business owner can apply for business finance products, but business loans can be more difficult to get than personal finance – especially if the business is quite new. Businesses often fail and are dissolved – this is similar to a borrower “dying,” but much more common and more likely to happen during the loan period. To protect against this, lenders often expect more security, or personal guarantees from the owner to cover the debt in the event of a failed business.
What types of products are available in business finance?
The most basic products are bank accounts, credit cards, and loans. Some institutions provide payroll services as well.
What types of loans are available to businesses?
This is money loaned to a business in the traditional sense – like a personal loan, but to a business rather than an individual.
It must be paid back through regular payments, and incurs interest charges and other fees. For small businesses especially, the credit rating of the business owner is an important factor in the application assessment, as is the record of responsible banking, cash flow, assets, company growth, economic climate, and other factors. In many cases, security against the loan may be necessary.
This gives the lender equity shares in the company in exchange for providing the loan. Banks seldom offer equity financing, but if the business is likely to grow quickly, private lenders may be the best source for this. Just think of venture capitalists in the tech industries.
This begins as a type of debt financing, but if the loan is not repaid as agreed, it converts to ownership of shares.
Business angels and private investors
This includes individuals or companies who invest money in promising companies, usually very early on, but can include crowd-funding as well. These are similar to Venture Capital Funds, but less formal, and usually less aggressive in the returns they expect.
Venture capital funds
These are lenders, usually wealthy individuals or groups (including investment banks), who provide equity to promising businesses. They usually demand high returns and have a shorter-term interest in the company, often five years or less.