Important Factors You Must Consider Before Opting For A Financing Product

Understanding the specific need for which you seek finance is extremely important. For example, you might need finance to boost your working capital, for buying equipment, for buying or leasing land, etc. You also need to look at the current status of your business and its assets to understand how much of an interest rate and security requirements you will be able to meet and tailor your finance product accordingly. We have discussed the most common types of finance that businesses access to help you get a grip on the basics.

Factors to Consider While Choosing the Right Type of Financing

The type of financing your business needs depends on if you need it for short term, medium term or long term. It also depends on the reason you need it for; for example, to enhance the working capital, to purchase plants & equipment, etc. Depending on the reason and the time of availing it, the finance that you access could be of different kinds. It could be an overdraft for working capital, leasing finance for equipment, one time up-front loan, etc.

One more important consideration while deciding on financing is to understand the rate and security requirements of the loan. You need to thoroughly understand what kind of interest and security you can afford given the present status of your business and assets. Depending on your business needs, you can select the right option for you.

Different Types of Financing That Are Available

We will discuss different types of debt financing that you can avail for your business needs. We have divided the different types based on the broad needs/nature of the business:

For short term, seasonal or immediate working capital requirements:

Overdraft: While availing overdraft, ensure that the overdrawn balance moves regularly into credit and be prepared to return the overdrawn amount as demanded by the bank.

Commercial bills of exchange: It is Important to remember that the applicable interest has to be paid in advance and the bills are highly sensitive to interest rate fluctuations.

Factoring: The business needs to have a strong credit sales history with clients that are credit worthy.

For leasing of equipment, plant and vehicles:

Leasing finance: The good part is that working capital is not affected and no security is needed separately, since the asset becomes the security by default in most cases.

For purchase or acquisition of land, plant, equipment, vehicles, assets:

Hire purchase and asset purchase finance: A capital deposit is required and hence it draws on the working capital

Term loan: Mostly availed for purchase and setup costs of new business. Remember to negotiate the repayment schedule according to the cash flow of the business.

Personal instalment loan: These are usually applicable for relatively low finance amounts for purchase of vehicles, equipment, etc. security may or may not be required.

Mortgage loan: Mostly availed to purchase fixed assets like land, office space, etc.

For importers and exporters:

Trade Finance: Facilitate overseas transactions. It may be good to avail the advisory services of your lending institution/bank regarding the creditworthiness of the overseas client.

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