Business Finance: sourcing loans

There are three ways for a business to find financing:

• Shareholders' equity - your's or other investors' money.
• Reserves - profits put back into the business.
• Borrowed funds.

If you decide to raise capital by borrowing money, consider the source and type of financing that will be best for your needs. Ideally, you should match the financing and the term of the loan to the specific purpose for use of capital.

Types of Business Finance

Short Term Business Finance

Commonly known as 'working capital', for funding the day-to-day running of the business.

Working capital should not be allocated for long-term projects because it is generally more expensive (in terms of interest rate) than money paid back over a longer period. Some examples are:

• Bank overdraft
• Commercial bill
• Debtor finance
• Trade credit

Medium Term Business Finance

This is used for 3-10 year periods where the capital is principally used to finance equipment, business expansion and development of new products.

Examples are:

• Term loan
• Personal loans
• Leasing

Long Term Business Loan

This type of capital, also called 'term loan' is used to fund the purchase of fixed assets such as the business itself, land, buildings, plant or machinery which will directly or indirectly contribute to profit over a period of years.