What Entrepreneurs Must Know About Business Financing

What Entrepreneurs Must Know About Business Financing

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Intro

Business financing is a means by which a business entrepreneur obtains financial aid for either starting a new business, purchasing an existing business, or feeding money into a current business. There are two major categories of business financing that are applicable to either a small business or for a large high end merchandiser.

Debt Financing

The first category of business financing is known as debt financing, which is the process by which an individual raises the money for both working capital and its capital expenditures. This happens through the selling of bonds and bills to an investor.

In this form of business financing, once the investor lends the money to the individual, the investor becomes the creditor and thus receives an assurance of payment of the principal amount and the interest.

The interest on the debt in the debt financing system of business financing is a deductible expense in the computation of the taxable income, which implies that the effective interest is lower than the stated interest once the business of the individual is profitable.

If you are interested in business finance through debt financing, the bonds, bills and notes that are produced as a seal of security will be forfeited in the incident of failure to repay the debt. Some of the common institutions of debt financing which you could be heading to will include the banks, credit unions and friends.

Equity Financing

The second category of personal business financing is the equity financing, which is the process of raising money for the business enterprise through sale of ownership interest. Here, an individual raises money for a business investment through sale of the business shares.

Sale of equity shares as a way of business financing is advantageous since the profits accrued from the investment can be used in the expansion of the business, as opposed to repayment of loans evident in the debts.

When financing a business through sell of shares, the individual dilutes ownership and control of the business, while the investor or the person who provides funds for the shares becomes part of the business. This allows them to share profits depending on the amount of share holder of equity.

In case you are now seeking equity financing as a form of business financing, you as the entrepreneur must act in good faith to furnish the investor with the significant business events. The major sources of equity financing you could be headed to include the venture capitalist, family and friends (although most of these sources may give a requirement of compliance with the securities laws).

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Categories: Business Financing

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