What Kind of Financing is Right for Your Business?

Most businesses need financing. Unless you won the lottery or inherited a fortune most people start a business with either their own funds or a combination of their funds and financing. Even an established business needs financing at one time or another.

Cash flow is different than profits and profits do not guarantee money in the bank. Entrepreneurs need financing for inventory, payroll, expansion, develop and market new products, to enter new markets, marketing, or moving to a new location.

Defining and selecting the right financing for your business can be a complicated and daunting task. Making the wrong deal can lead to a host of problems. Understand that the path to getting financed is neither clear nor predictable. The financing strategy should be driven by corporate and personal goals, by financial needs, and ultimately by the available alternatives. However, it is the entrepreneur’s relative bargaining power with investors and skills in managing and orchestrating the finance drill process that actually governs the final outcome. So be prepared to negotiate with a financing strategy and complete financials.

Here’s a brief rundown on selected types of financing for commercial ventures.

Asset-Based Lending

Loans secured by inventory or accounts receivable and sometimes by hard assets such as property, plant and equipment.

Bank Loans

A loan that is repaid with interest over time. The business will need strong cash flow, solid management, and an absence of things that could throw the loan into default.

Bridge Financing

A short-term loan to get a company over a financial hump such as reaching a next round of venture financing or filling out other financing to complete an acquisition.

Equipment Leasing

Financing to lease equipment instead of buying. It is provided by banks, subsidiaries of equipment manufacturers and leasing companies. In some cases, investment bankers and brokers will bring the parties of a lease together.

Factoring

This is when a company sells its accounts receivable a a discount. The buyer then assumes the risk of collecting on those debts.

Mezzanine Debt

Debt with equity-based options, such as warrants, which entitle the holders to buy specified amounts of securities at a selected price over a period of time. Mezzanine debt generally is either unsecured or has a lower priority, meaning the lender stands further back in the line in the event of bankruptcy. This debt fills the gap between senior lenders, like banks, and equity investors.

Real Estate Loans

Loans on new properties-which are short term construction loans-or on existing, improved properties. The latter typically involves buildings, retail and multi-family complexes that are at least 2 years old and 85% leased.

Sales/Leaseback Financing

Selling an asset, such as a building, and leasing it back for a specific period of time. The asset is generally sold at market value.

Start-Up Financing

Loans for businesses at their earliest stage of development.

Working Capital Loan

A short-term loan for buying assets that provides income. Working capital is used to run day-to-day operations, and is defined as current assets minus current liabilities.

It’s always better to get by without taking on debt. But on the other hand, most businesses need to acquire financing at one point or another. A home office is less likely to require financing than a business location that you rent. A one person operation is less likely to need financing than one with employees.

When you do need the financing, remember to examine all avenues of financing open to you and scrutinize the terms of all the proposals.

Features of a Hard Money Loan

People who have the opportunity to invest in property, may need a hard money loan to proceed with the purchase. This type of mortgage is a financing tool these people use to acquire the house or multiple housing units so that they can buy, and then resell it. A hard money loan has many important features.

1. A private money mortgage is one where investors gain access to the funds to purchase a property for resale. NLD Settlement Corp also known as the “hardmoneyman” is one such lender. The idea is to make a profit, but in many cases is not to live in the home. Yet, a hard money loan can help a home owner because it can allow an investor to purchase their home when they desperately need to sell it quickly.

2. A hard money loan can only be based on collateral. The collateral is the home or housing units. What is more, because of the risky nature of the venture, only approximately 50% to 60% of the normal property value will ever be covered by a hard money loan. This is because the value being considered in the loan is based on the immediate purchase price, which refers to the amount of money the seller could get if he was forced to sell within a one to three month period.

3. To get an investment property loan, you do not have to have good credit. The important considerations are whether you will be able to pay back the loan, whether the property is worth the money being lent, and whether you have a sizeable down payment.

4. You should never expect to have an early payment clause on a hard money investment property loan. This is because the very nature of the funding product is that the money is just being lent for a short time. No one expects you to keep the loan in the long term. You are not legally bound to pay off the loan immediately, but the expectation is that you will.

5. A private money loan has a higher rate of interest than prime mortgage rates. However, it is much riskier for the lender. The person usually has worse credit and probably does not live in the home. The people who take out a hard money loan often would not even qualify for a regular mortgage. By getting a hard money loan, they can take advantage of an opportunity they might not otherwise be able to fund, and therefore be able to make some money.

True Facts About the Hard Money Loans

When you search for the loan options, you come across several alternatives with distinct characteristics. One of these options is the hard money loan that comes with several benefits as well as some drawbacks to help the loan seekers fulfill their essential needs and desires. However, if you study or observe the loan market, you would come to know that the individuals opt for these types of finances in very rare cases. Along with this alternative, the loans offered by the FHA lender also have been found to be an effective alternative for the loan seekers that enables the borrowers to buy the house of their dream.

The hard money loan has really some of the stricter terms and conditions that hurdles the decision of the borrowers to avail these funds for their purpose. Even the FHA loan givers specify some of the stiff terms and clauses due to which the people hardly go for it. The eligibility criteria and the requirements for availing these facilities completely vary from one state to another. The hard monetary finances are purely asset based and the lender always try to supervise the property before approving the loans you have applied for. The common citizens, however, are benefitted in several ways by the finances offered by the FHA lender.

The hard money loans being collateral-based, the loan seekers hardly opt for these alternatives. But when it becomes extremely important to manage for some finance in certain circumstances, they are not left with any other choice. In case, if they have some time in hand to accumulate the amount, they search for other ways, but seldom prefer these loan options. Being a property-based fund, the lenders in this case do not really bother about the credit score of the loan seeker and even if he maintains a bad credit record, he can easily get it approved at the cost of his asset. In case of the FHA loans, the FHA lender provides for a fixed rate of interest that attracts more and more people towards availing these financial facilities.

Another fact about the hard money finances is that unlike traditional loans, these funds do not take too long in getting approved. The approval time that is generally taken by the traditional loans is quite long and thus, in case of immediate needs, the loan seekers knock the door of these finances other than opting for any other alternative. The main reason behind it getting less time is that there is no checking of credit scores or history that would consume the time. But in case of the FHA finance, the FHA lender sees to it that a particular borrower fulfills at least the minimum requirement in terms of the credit scores.

If you want to get your hard money fund approved easily, you must examine your property and try to keep it look good and well-maintained so that the lenders get impressed and provide you the finance for your immediate needs. Even in case of Federal Housing Administration loans, it is advised to go through the clauses and terms specified by the FHA lender thoroughly to avoid any confusion at later stages.