Some Important Categories Of Business Finance
Launching, running, and diversifying businesses requires a lot of money. Simply equity is not enough. A business requires all the affordable funding instruments that are available to it from all the diverse sources and categories of business finance.
The various categories of business finance include business startup loans, other loans, bonds, fee-based funding services, and special purpose grants for business development. Let us discuss below some important ones out of them.
Business startup loans- A new business is always a risky venture as no previous business statistical data is available as to the success potential of the business. In such cases, banks and other non-banking finance companies provide secured loans to the business. Secured loans involve mortgaging of business assets.
Such loans are also available at competitive rates of interest to women entrepreneurs and to persons belonging to minority ethnic groups. The US Small Business Administration (SBA) approval is required for such a minority business loan. It regulates all minority business loans. Other business loans- Many agencies that include banks and other finance companies provide loans to businesses to tide over their cash flow problems and also for the procurement of capital goods and equipment. They also finance diversification projects of businesses. Most banks provide the facility of online business banking to its corporate customers. Through this facility, the customers can make online applications for business loans. The representatives of the banks then assess the creditworthiness of the businesses and their present and future profitability. They also assess what other loans the businesses are already repaying. Accordingly, if all the aspects are assessed as okay, the banks then sanction loans to the businesses. Fee-based business funding services- These services are provided by invoice factoring companies. The companies buy the invoices raised by businesses to their customers against the supply of products or services to them. In return, the factoring companies provide immediate funds (within 24 hours) to the businesses to the extent of 70% to 90% of the net realizable value of the invoices. After the customers make the actual payment to the businesses against the invoices, the factoring companies release the balance amount realizable against the invoices (minus their fees) to the businesses. The fee generally varies from 3 to 5 % (per month of non-payment by the customers) of the net realizable value of the invoices. Such funding services are termed as business receivable funding services. Such services are also known as business invoice factoring services. The word factoring refers to the invoices having been discounted to the extent of the fees paid by businesses to the invoice factoring companies. The term accounts receivable refers to all debts that are owed to the businesses. The accounts receivables are unrealized assets of the businesses in the form of invoices raised on customers and other debtors. Besides the above categories of business finance, special purpose grants for business development in rural areas are also available from state government agencies in the US.
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