Tag Archives: business
How to Borrow Money, Part 1
There are two types of financing: equity financing and debt financing.
The most frequent source of funding for a small and mid size businesses is to borrow money. Getting a loan usually is not an easy and short process.
It is always a good idea to learn as much as you can in advance about the factors that important in the decision-making process of banks and other lenders when they consider your loan application. For more detailed information you may refer to my other articles.
When looking for funding, you should consider your company’s debt-to-equity ratio, which is defined by dividing amount of borrowed money by amount of invested in the business. The lower the ratio is: more invested and less money borrowed, the easier for you will be to get financing and at more favorable terms.
The decision what financing to pursue works on case to case basis, but the general rule of tomb is: if you have a high debt to equity ratio you should seek equity financing and vice versa.
In the most cases it is impossible to get 100% financing. Institutions want to see at least 20% of equity in a business. Building equity can be achieved by investing owners cash or build it through retained earnings, but by itself does not guarantee that you get financing for a business.
Equity Financing
Equity financing means financing a business by selling ownership interests to investors or, the money is raised in exchange for a share of ownership in the business or having the right to convert other financial instruments into stock. It is the way raise funds without incurring debt, or without obligation to repay a specific amount of money at a particular time.
Equity sources can be divided into two groups: non-professional such us relatives, friends, and employees, etc. and professional that can be divided into two sub groups: Private such as Angels and Venture Capital and Institutional such as Hedge Funds and Government Assessed Sources. Most of professional groups specialize in particular industries.
Venture Capitalists may review thousands of proposals a year, but invest only in a few that have bigger prospective returns on the capital, great management team, industry growth, competitive advantage and solid exit strategies (e. g. IPO). Venture Capital firms usually passively involved in a companys management, unless business fails to perform as projected.
Many people think that Venture Capital firms finance new businesses, but in the most cases they prefer established companies with stable cash flow. If you need money for a start up look for an Angel (Private) Investors. Angels might work alone or in groups (sometimes as big as few hundred people) and usually actively involved in companys management.
Pros and cons of equity financing
Company shares give you two major rights: participation in the future companys profit-sharing and decision-making processes. The biggest drawback of equity financing is that you relinquish those rights to an outsider.
To be continued.
Yury Iofe, MBA
Universal Business Structured Solution
More educational resources by Yury Iofe:
www.ubssolution.com
UK Pawnshops: Traditional Vs. Modern Way Of Lending
As the recession continues to hurt the economy, we will continue seeing shops close left and right. However, there is a particular industry that is booming and has since expanded to become one of the most promising industries.
Since last year, the National Pawnbrokers Association has reported an estimated 8% growth in the pawnshop industry in UK as more and more middle to high class individuals turn to pawnshops as a way to get money in exchange of personal assets.
Through the years, it has long since evolved from a simple street corner business to a sophisticated and high end contract between a borrower and creditor. Pawnbroking services can vary depending on the pawnshops. There are those that accept wine collections or premium aged cheese as collateral.
Currently there are two types of pawnshops operating in UK:
Brick and Mortar The traditional way of doing business. A borrower goes to a pawn shop to have their valuables appraised. Transactions are done on a face to face basis where both parties agree on a specific contract. The benefit of doing business with a brick and mortar pawnshop is that the borrower can build a relationship with the lender that can be beneficial for both. A borrower can easily get an extension on the due date or a lower interest rate if he has shown credible payment history and is considered as a regular by the owner. Lenders can get additional clients through referrals made by the borrower. It can also build reputation and increase clients in the long run. The downside of doing this kind of business is that you cannot easily expand and have immediate access to other clients and clients have to personally go to a store to have an item pawned.
Online – With the evolution of technology, pawnbroking can now be done through online transaction. Borrowers no longer need to go personally to a shop to have their valuables appraised. By doing online transaction, appraisal and delivery of pawned items and exchange of money can be done with a simple click of the mouse. It is all about convenience and making it easier and faster for the client. Furthermore, it gives access to a wider market as it makes it easier for other people to try borrowing from a pawnshop. The downside of doing this kind of business is that it does not go beyond a professional service.
Although service can be impeccable, it strictly follows certain policies and rules that can be a bit stifling and irritating for clients. Another cause for worry is that vital information such as address and name is being sent online, which makes it vulnerable to hackers and other internet savvy individuals.