Types of Financing

Financing your business venture can be provided directly from your personal capacity, but usually a loan has to be taken out to provide the business with the capital it requires, this includes the working capital and the start up capital.

It is important to find a type of financing that will suit your type of business.

Different businesses will require different types of financing as cash flow and terms and conditions will vary.

The following information will help you in deciding which financing is suitable for your needs:

Financing a Franchise:

Financing a franchise is normally easier than financing your own business as the franchise company will assist you in finding a loan. Also, the banks and loan institutions will be more willing to give a franchise a loan. First contact the brand that you want to get a franchise of and ask questions regarding financing and support. Certain types of financing are discussed in detail below:

Debt Financing

Debt financing does not give the lender ownership control, but the principal amount borrowed must be repaid with interest. Length of the loan, interest rates, security and other terms depend on what the loan is being used for.

Commercial Bank Loans

A. Short-term: Loans for short periods (30 - 180 days) usually made to cover temporary or seasonal needs for inventory or personnel use. These are common for established businesses, but may be hard for a new business to obtain.
B. Medium to long term: These loans may be repaid over any time from 1 to 5 or even 20 years depending on how the funds are used. The source of repayment is the cash flow of the business. Typical uses are for equipment, fixed assets, etc. Most loans to start a small business will be of this type. This is the usual and most widely chosen type of loan is new businesses.
C. Real estate financing: Real estate is typically financed over a fairly long term, 10 to 30 years. Expect a down payment of about 20%.
D. Accounts receivable financing: Money loaned against accounts receivable pledged as collateral.

Equity Financing

Equity is money put into a business by the owner, private investors, and/or venture capitalists. Equity gives an investor ownership and possibly some control of the business. For example a 25% ownership of the business or a 30% share of the annual profit.

A. Your own savings: It is nearly impossible to start a business without using some of your personal funds. It is hard to convince someone to take a risk in your idea if you are not prepared to risk your own money.
B. Friends, relatives, business associates, etc.: Most small businesses get started with this kind of help. They may provide some of the cash or may back a loan from a financial institution.
C. Venture capitalists: Groups invest in a new firm (usually high tech or innovative concepts) looking for an obscenely high return on investment. Minimum investments are from several hundred thousand to millions of rand.

Financing a franchise is not as complicated as it might seem and with the help and support of the franchise brokers it will be an easier process than you might think.