Category Archives: Business Financing

An Overview of Commercial Financing for Business

An Overview of Commercial Financing for Business

Financing a business, keeping the economic perspective in mind, is very different from obtaining a loan for personal reasons. From an economic perspective, the expenses that have to be borne by a business can be broadly classified into fixed costs and variable costs. Fixed costs remain the same, regardless of the level of production. In other words, whether or not a business is in operation, the amount of fixed costs will remain the same. Expenditure on machinery and equipment is an example of fixed cost. Variable costs, on the other hand, change, depending on the level of production. Variable costs are directly related to the level of production. The cost of raw materials is an example of variable cost. Hence, from the point of view of an economist: Total Cost = Total Fixed Cost + Total Variable Cost

From the perspective of accounting, costs can be classified as implicit or explicit. Explicit costs are expenses which can be accounted for in monetary terms. Both, rent and wages paid, are explicit costs. On the other hand, a businessman who does not pay his wife for assisting him in day-to-day workings of a business, is said to incur implicit costs. Hence, for the purpose of accounting, total cost can be defined as: Total Cost = Explicit Cost + Implicit Cost

Commercial financing is needed, not only during the start-up phase, but also during the development, operating, and growth phase.

Pioneer Phase/Start-up Phase

Seed Capitalists: Seed capital is usually provided by friends and family members of an entrepreneur. This funding is necessary for activities like market research in order to test the feasibility of the business venture. The amount of seed capital is usually small.

Angel Investors: A business can also be funded during the start-up phase by angel investors. Angel investors are affluent people who finance a business for reasons best known to them. In other words, return on investment (ROI) may not be the sole criteria for funding. Angel investors may not demand participation rights in the business and they generally provide finances on a small scale.

Venture Capitalists: Venture capital is provided by institutional investors like banks, hedge funds and pension funds, who believe that the enterprise is capable of generating long term profits. Venture capitalists usually come into the picture after the business has established a few basic operations. Since venture capitalists invest other people’s money, they are very particular about the return on investment (ROI). Moreover, they demand participation rights in the form of preferred stock, and they may also be a part of the Board of Directors.

Development, Operating, and Growth Phase

Commercial Construction and Real Estate Financing: Banks, credit unions and other lending institutions provide commercial construction loans. US Small Business Administration loans (SBA loans) are also available for small entrepreneurial ventures. Depending on the needs of the business, an entrepreneur can avail of acquisition and development loans, bridge loans, mini-perm loans, take-out loans, joint venture loans and loans for purchasing real estate . These loans supplement loans provided by venture capitalists and angel investors.

Asset Sale Leaseback: Asset sale leaseback is common in case of real estate. In this case the entrepreneur sells an asset only to rent it back from the buyer. The main reason for asset sale leaseback is to remove the asset from the balance sheet of a company while retaining its use. Asset sale leaseback is undertaken for accounting and tax purposes.

Leasing Equipment: Generally buying equipment does not pose a problem even if the business does not have adequate finance. This is because the equipment functions as collateral against which a business borrows money for purchasing the same. However, start-ups prefer leasing equipment. The business is required to make monthly payments towards the rent of leased equipment. At the end of the leasing period start-ups have the choice of either buying the equipment or continue leasing it.

Invoice Factoring: Many a time, a business uses invoice factoring in order to convert its accounts receivables to cash so that it can meet its expenses in case it encounters delay in receiving payments from the customer for services rendered. In case of invoice factoring, the business sells its invoice to a third party and receives up to 80% of the value of the invoice. Once the customer pays for the services rendered, the business obtains the remaining value of the invoice, less the amount of fee charged by the third party.

Lines of Credit: Lines of credit are usually obtained by the business to meet its working capital requirements and avoid cash flow problems. A line of credit, unlike a loan, is not a lump sum amount on which the borrower is expected to pay interest. Using a line of credit is similar to using a credit card. Depending on the needs of the borrower, the amount of money required can be withdrawn from the sanctioned loan, and interest is paid only on the amount used/withdrawn, and not on the amount sanctioned.

These are some ways of financing a commercial business. In addition to these, entrepreneurs can obtain a number of other short-term and long-term loans. They can also make use of credit card advances in case of good credit history. Financing is a prerequisite for the establishment and the successful operation of any business. Regardless of whether the business is in the pioneer, growth, or mature phase, the importance of commercial financing never diminishes, although the amount of finance required may vary.

Importance of Social Cost Benefit Analysis

Importance of Social Cost Benefit Analysis

Social cost benefit analysis is a part of calculating the merits of a project or a government policy. As the name suggests, social cost-benefit analysis of anything is associated with its social impact. This means that how a project or a policy will affect people is analyzed. Only after calculating the opportunity cost of a project, it is approved.

The scope of social cost benefits can be applied to public investment and also to private investment. In case of public investment, it plays a major role in the economic development of a developing country. And, in case of private investments social cost benefit analysis is important as investments are to be sanctioned and are monitored by the government. There are two aspects of calculating the cost benefit analysis of any project. One is the private cost-benefit analysis and the other is social cost-benefit analysis. Though, social cost-benefit analysis is usually undertaken by the government.

Social cost is often in contrast with private cost. Major differences between social cost benefit analysis and private cost benefit analysis are as follows:

1. In social cost benefit analysis, not only profit but also other effects like how will it affect life of others are considered. Whereas, in private cost benefit analysis, the focus of the analysis is on maximizing profits.

2. For calculating social cost benefit, market prices for the factors to be considered cannot exist. Therefore, market price is not the main factor taken into consideration while calculating social cost benefit. Whereas, for private cost benefit analysis market price forms the base of the analysis and the key factor that determines if a project is viable.

Social Cost = Negative Impact
Social Benefit = Positive Impact

Social cost benefit analysis has been introduced to develop systematic ways of analyzing cost and benefits of factors which do not have market prices, like effect on environment and traffic. Social cost-benefit calculates non-monetized benefits/ losses. It is normally used for large fund projects like constructing a dam, a road. Such projects have higher social cost-benefits and also affects the price level to an extent.

Example: If a bridge is to be constructed then how much will it benefit the people who live in that particular area, is to be analyzed. Therefore, how many people are willing to use the bridge, how much traffic will be reduced and what is the increase in cost of traveling, will have to be assessed as a whole to come to a conclusion. Suppose, if people are not willing to use the bridge if the cost of traveling from the bridge is $5 and if $7 has to be charged per vehicle to make this project feasible, then the government may consider dropping the project out.

On the other hand, if people are willing to travel using the bridge, being indifferent to the toll price-difference of $2, and the traffic is reduced by a good amount, then the government will sanction the project. Therefore, it is beneficial to take up a project if its total benefits (B) are more than its total costs (C).

It can be put up as, a project should be undertaken if, B/C > 1 or even when B=C. That is, when the cost-benefit ratio exceeds unity or when benefit derived and the cost of the project is equal. Before sanctioning a project, cost and benefit of alternative projects are assessed too. For example, the opportunity cost of setting up a hospital instead of a school.

Importance of Social Cost Benefit Analysis

The importance has been explained with the help of the following factors that affect the general masses as a whole.

Market Failure
Market failure when a big project is not affecting everyone but only a few. A private firm would only look at profitability and related market prices to take up a deal but the government has to look at other factors. To determine the social cost in case of market failure and when market prices are unable to define them. These social costs are known as shadow prices.

Savings & Investment
Impact of the project on general savings and investment level. A project that induces more savings are investment in an economy and not the other way round.

Distribution & Redistribution of Income
The project should not lead to accumulating income in the hands of a few but, it should equally distribute the income.

Employment and Standard of Living
How a project affects employment and standard of living will be taken into account as well. The deal should lead to increase in employment and standard of living.

Externalities
Externalities are impacts of a project which can be both harmful and beneficial. Therefore, both the effects are to be assessed before sanctioning a deal. Positive-externalities could be in the form improvement in technology and negative-externalities could be in the form of increase in pollution and destruction of ecology.

Taxes and Subsidies
In a general cost benefit calculation, taxes and subsidies are considered as expenses and income respectively. Though in case of social-cost benefit analysis, taxes and subsidies are considered as transfer payments.

Social cost benefit analysis enables the government to take up new developments which will benefit everyone and not just a few. Also, it helps in bringing about an overall development in an economy and can help make decisions that will increase employment, investments, saving and consumption, thus, improving the economic activities in an economy.

Ideas For Creative Business Financing

Ideas For Creative Business Financing

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Whether you are already a business owner, or are starting up new, the first thing that you will think about is finance. There are many ways of going about getting the money you need.

That said, you must also take into consideration several factors before you get the money. Have a look at the various options you have in front of you, and compare it with your business plan and projected revenues. Realistically speaking, identify how you would be able to repay the money that you are borrowing.

Here are some ideas that will help you get the money you want.

Savings Account: Here we are talking about your own savings account. Before you dip into your kitty of savings, consider the following: How much savings have you got in that account? Are you dependent on that money for your day-to-day expenses? How confident are you that your business venture will succeed? Be realistic while you make these considerations. If the savings account is not something you depend upon, and you can afford to forget about the money you take from it should you incur a loss, then go ahead and take the money from it. The upside to this is that you are taking an interest free loan from yourself and saving quite a bit of money on that end. You can even repay this loan in variable installments, and not suffer penalties for it.

Family and Friends: This is also a good option for you to acquire funds for your business venture. Depending upon what you discuss with your friends and family members, you can choose the method of repayment, and also if you are liable to pay interest. The downside to this is that if you cannot repay the money back in the time that you promised, you stand to lose a good relative or friend.

Partners: Another way of generating funding is to take on partners in your business. This is again a matter of choice, and your partner must have the money and the inclination to invest.

Loans: This may not be a very creative idea, but some banks offer very interesting kinds of personal and business loans. It is worth a shot to go have a look at these options. You may just strike a gold mine, and find the perfect method of financing your new venture.

Sell the Junk: If you have any unused premises, or unused inventory lying around, or unused trademarks and licensing rights, it is a good idea to sell them to those who need them. This is a good method of recycling your own assets to create finance for your enterprise.

Sell Shares: Selling the shares of your company is a time-honored method of creating finances for your company. If you have a new company, you can do it. You can also do it, if you own a well-set company. You can also sell the shares to your employees. Talk to your CPA and get more details.

Advertise: This sounds silly, but sometimes an advertisement can also generate interested financers for your project. Putting word out there ensures that you generate interest from persons looking for a good investment opportunity. It also gives you a chance to advertise about your company along with it.

These few ideas should help you generate funds for your new venture. Good Luck!

How to Raise Money for a Business

How to Raise Money for a Business

The capital is one of the first things that needs to be taken into consideration when one is setting out on a business venture, and there are many different sources to obtain this capital. It is not necessary to stick to one particular source rigidly; even a combination of various different sources can be used.

Anyone who is wondering how to raise money for a restaurant, a start-up, an advertising agency, or any other small-scale venture should keep these methods in mind. Approaching the right people for it is vitally important for the success of the business, and if this is not catered to properly, it will be doomed from the very beginning.

Personal Savings

This is the most obvious source of money for starting a business. If you have saved up enough money over the years, go ahead and make use of it to serve the underlying purpose. You will not be answerable to anyone, and you will not have to worry about repaying someone. If you choose this option, ensure that you are not using all your savings though. Many people neglect this option because if they lose it, they will have nothing left to live on.

Venture Capitalists

This is the next most obvious source for your initiative. Venture capitalists are professional agencies who put in venture capital into an upcoming business. What they get in return is either its share, or a share of the profits, or pretty high interest rates. It may sound like exploitation, but this is one of the best ways to get money. Venture capitalists are always looking for new and innovative business ideas that are likely to succeed.

Angel Investors

These are a refined form of venture capitalists, but many people think that they mean the same thing. Angel investors are less demanding than venture capitalists and remain with your initiative in the long run. Usually, these are someone who you would know personally, and they are simply looking for ways to get a higher return on their investment. How companies raise money depends a lot on the nature of the business and the method of entrepreneurship adopted. Angel investors also help them by providing some guidance and mentoring.

Personal Borrowings

Here is a method that should be avoided as far as possible. You can borrow money from someone you know, namely your friends, family, or other people. The problem here is that once you mix business and personal relationships, things start to get a bit sour. This is a situation that needs to be handled with great tact and diplomacy, and not everyone can manage to do that. Still, this is a method that many people consider.

Bank Loans

Another answer is to approach a bank for a small loan. With banks, you will not be required to pay a very high interest rate, but you will need sufficient documentation about the business model of your initiative. Along with that, your credit history and financial stability will also be scrutinized, in order to find if you are worthy of getting a loan. Most people would love to get it, but are simply not eligible. This is especially true for someone looking to collect the money, without owning any fixed assets.

Advertising

Here is another answer, but one that requires a suitable amount of investment and more than a fair share of patience. If you can handle the advertising of your upcoming company well, you can get more than enough money to sustain it in the long run. There are some websites that also allow you to advertise your business plan and then suit you up with a matching investor. This is a slightly unreliable method for sure, but it works wonders if one can find the right match.

Other Options

One can approach some small-business investment companies, business development commissions, life insurance companies, or a money broker. The reliability of these options will not be very high, and their demand may be exorbitant, but if you have run out of all other options, then this is something that you will need to resort to.

You should act as early as possible, in order to get sufficient capital and business financing. There is a variety of sources available, and as long as you have a great and reliable plan, you will be able to procure capital. It is not all that difficult; all you need more than anything else is faith in yourself.