Tag Archive | loans

Entrepreneurs Are Looking Everywhere For New Money

loansTimes have been hard for entrepreneurs of late. Take Rick Stender, the founder of a bike company. He wanted to borrow money to pay for bike part imports from China so that he could build a bunch of bikes in the US and then sell them on to his customers.

Unfortunately, thanks to ongoing financial repression by big commercial banks and the government, he was unable to get credit, despite having a viable business plan and a customer base.

A random investor in the local community took pity on his business and lent him the money that he needed when the banks wouldn’t. Stender bought the parts he needed, made back the money to repay and loan, and made the investor more than $4,000 in the process.

Entrepreneurs need to realize, therefore, that the people in their local neighborhood are a great resource when it comes to setting up their own businesses. Most people should forget about banks unless Trump does something to completely overturn the existing financial order.

According to Colbeck Capital Management, one of the problems that institutional investors have is that they overweight idiosyncratic risk while they underweight systemic risk or the risk of excessive leverage.

In practice, this means that banks will quickly find fault in individual business plans and use that as an excuse not to lend money, but they’ll have no problem lapping up highly-leveraged assets, like mortgage-backed securities. It makes for a totally skewed market, and it’s not fair.

Neighbourhood Banks

Because of this unfortunate phenomenon, local communities themselves are returning to their traditional role of offering finance. Instead of putting their money in massive companies halfway around the world, many communities are recognizing the value of having successful entrepreneurs in their own areas and are adjusting their investment portfolios to match.

According to advocates of the system, everybody wins. Wealth stays in the local area, jobs are created, and investors still get a return for putting the money in.

Flexible Lending

Entrepreneurs are also benefiting from this new trend. Rick Stender’s loan wasn’t rigid, like a loan from the bank. Instead, it was flexible because he was able to constantly negotiate with the person making the loan. Entrepreneurs will frequently run into trouble, as was the case for Stender. But even when things were tight, his creditor allowed him to go without having to pay interest for a couple of months, because he wanted to see his business succeed.

According to software engineer, Sallie Calhoun, local investing is key to the success of businesses in the local area. She says that it offers greater flexibility and it makes it more likely that the loan will eventually be repaid.

You’re much less likely to walk away from the person you’re borrowing from if they’re a valued member of your local community. In turn, this has the effect of lowering interest rates overall, simply because it is less risky to lend to a person you know.

 

 

 

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Equity or Debt Financing; Which is better for you?

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For every entrepreneur, capital is a major component of business success. Despite the existence of a wide variety of sources of finance, developing a good financing strategy is core. Sources of financing in the business world are broadly categorized into equity and debt financing.
Therefore, this article will examine each of them and provide you with the necessary insights so that you can make informed decisions when doing your startup or developing your existing business projects.

1. Equity Financing;

Equity financing simply means the issuance of shares of common stocks to investors. The main players in this segment are the venture capitalist and angel investors (they fund the small startups). With equity financing, you will be forced to offer some shares of your business or company. This percentage of ownership goes to the financing parties that may include; family, friends or real investors.

Pros of equity financing
Investors take all the business risk and in case the business fails, you will not be required to repay the money.
Investors focus on long-term returns; therefore, you are given enough time to grow your business.
The profit earned is ploughed back into the business instead of loan repayment.
It gives small and growing business an opportunity to tap into new and existing investors networks thus, improving their reputation.

Cons of equity financing

Investors will own part of your business or company. This means that they are entitled to enjoy the profits of your business.
The time taken for you to secure able and trusted investor might be long
Investors must be consulted in case you want to make a major decision concerning the company
Investors may demand higher returns that may be more than the bank loan rates
In the case of dispute or misunderstanding between you and the investors, you may be required to transfer ownership of your business or company.

2. Debt financing

Debt financing means taking a personal or business loan from friends, family or banks and pledging to repay it back together with the agreed interest at the end of the loan period. With debt financing, the bank or other lenders are not entitled to ownership of your business.
In most cases, a loan guarantee is required before you qualify for debt financing. This puts the lenders on the safe side in the event the borrower fails to repay the money back.

Pros of debt financing

The lender of the loan has no ownership rights to your business or company
You will enjoy tax deductions when repaying the loan interest
Lenders relationship ends immediately after loan repayment
It’s easier to forecast expenses since the interest on loans does not fluctuate
They are of wide variety, and one can choose either short-term or loan term loans

Cons of debt financing

Loan security is required to guarantee the loan.

The loan must be repaid within a specific period failure to which you business becomes at risk.
Reliance on debt financing over a long period can make potential investors lose confidence in you business. Therefore, you will not be able to secure equity financing in future.
Debt financing can put your business or company at risk in case of economic down-times. Reduced cash flows can make it difficult for you to repay the loan.
The growth rate is minimal as part of the profit earned is used towards loan repayment.

The bottom line;

In conclusion, as an entrepreneur, there is always a challenge when making a decision to either go for equity or debt financing. Whether you need cash to grow and expand your business or initiate your startup, look at pros and cons of each source of financing to determine the best choice for your business.

Most business owners go for both of them although it all dependents on the stage of your business, business type as well as the expected cash flows.