Types Of Business Loans And Their Impact On Organizations
As we all are prone to uncertainties in life, so are business companies, and like individuals, these companies too can face a financial road bump. Individuals sometimes opt for taking a salary loan or a wedding loan. Similarly, well-established businesses sometimes need financial infusion to meet their budget requirements. It is of utmost importance what type of lending institutions are funding these businesses because one wrong funding decision can lead to irreparable damage and lock the company into repayment terms that will drain the revenue and slow down the organization’s growth in the long run.
If you have ever applied for a car loan, a home loan, or any emi loan, you know well how funding is acquired from the bank through a sequence of processes. However, for small and medium businesses, there are various ways in which loans can provide financial assistance. The types of loans are debt financing, equity financing, and mezzanine capital. Let us understand them in detail in the following pointers.
- Debt financing:
This is the most common type of business financing in which the repayment is made every month until the debt is cleared, like a regular advance loan for individuals. For smaller business entities, the application and approval process is quite simple. The complexity comes when big businesses are in the picture because the banks will go through an extensive process of analyzing the creditworthiness through different reliable sources.
Critical features of debt financing:
- The companies applying for approved loans online should be up to date with their business records and only after the lending institutions are convinced of the credit score and performance history.
- There is only a give-and-take relationship with the bank in terms of funding amount, and the lenders by no means hold the right to interfere with the profit your business is gaining.
- The repayment amount is the confirmed expense that the financial teams can accurately incorporate into designing the forecasting models of expense management.
- Equity financing:
This type of funding comes from an individual investor or any investment firm willing to invest a portion of their money in any company’s products or campaigns. Once that product hits the market and starts gaining profit, these investors, also known as venture capitalists or angel investors, can avail their share of profit according to the agreed terms and conditions.
Critical features of equity investment:
- There is no liability of paying back the amount investors provided because they, like you, are the partial owners. So, if the product or idea fails, they will bear the brunt along with the business owner.
- As there is no compulsion for monthly repayment, ample liquid cash is available.
- Mezzanine capital:
This hybrid form of financing combines debt and equity financing features for lending banks. According to this format, the debt capital can be converted into equity interest if not repaid on time.
Critical features of Mezzanine capital:
- Start-ups and new businesses can opt for such financing methods showing remarkable growth in the early years of establishment but need years of financial data to provide for the loan credibility.
- Very little due diligence is required to approve this financial aid.
Businesses looking for any of these financings go through an extensive level of scrutiny about their organization’s financial position. It is not as simple as applying for a travel loan online.