Global Project Finance - Business Finance And Debt Finance - SBLC
It is the money introduced into a business. This is a basic requirement for businesses as funds are needed to buy raw materials, goods, assets, etc. to enable businesses to carry out various activities efficiently and effectively. Therefore, business finance can simply be defined as making money available for business as at when needed.
The Need For Business Finance
This is needed for the start-up of all business organizations. As the operations of the business grow, the need for more funds also grows. Money is needed to purchase and monetize machinery, fixed assets, buildings, lands or channel into other needs to grow one's business.
Moreover, funds are needed to carry out day to day activities of the business such as payment of salaries and wages, telephone bills, buying of raw materials, electricity bills and so on. They are also needed to cover the gap that exists between manufacturing and sales, as expenses are continually incurred until goods are sold and money is gotten.
- The amount needed as business finance varies from one business to another from time to time, as it is dependent on the size and nature of business.
- All sources of capital used in business and project finance are known as business finance.
- Business finance is required by small or large businesses, trading, or producing businesses.
- Business finance involves sourcing money from various channels and employing money into the business for different reasons.
Debt financing is the process of borrowing a certain amount of money and pay back later with interest. It is a loan taken by firms that are paid back most times with interest, but it is relatively cheaper than raising money as tax can be deducted from the interest paid. Most businesses, big and small benefit from the numerous advantages of debt fiance as they are able to obtain a loan with no upfront payment.
Major Channels For Debt Financing
- Financial Institutions: Credit unions, builders, societies, and banks. Funds can be made available as over draft loans.
In this regard comes Global Project Finance. This is a financial institution that gives low- interest - rate loans of 3.5 % f or a maximum of 10 years, and this is normally processed within 21 days of application.
- Retailers- Buying goods for business via store credit through a finance company. Some retailers can offer funds with no interest for a certain period while some offer a high rate of interest.
- Financial companies - These companies must be properly registered with the regulatory body, and they provide products through a retailer.
- Suppliers- Payment for goods purchased are delayed. The terms vary, and businesses with a good reputation are qualified f or this source.
- Invoice finance- Invoices are made (paid) directly to business however, some customers don't know about the arrangement s made wit h the financier.
- Peer to peer - The interest here differ base on the risk level. People who have a f und to invest are matched with people seeking a loan.
Family and friends - To avoid disagreement or misunderstanding, it is important to formally document clearly the condition of the loan, requirements for payment, and the interest rate. Consult a legal practitioner to help wit h the loan agreement
Benefit of Debt Financing
- There are many benefits attached when businesses are financed through debt
- It can be used by virtually all sizes and kinds of businesses.
- There are various opt ions to choose from (various types of loans, lines of credit, credit cards, etc)
- The lender does not have any control over the affairs of the business
- Tax can be deducted from the interest paid as a business expense
- The amount paid back monthly f or the loan is already known by the borrower, so it is easy to include it while making plans in terms of finances.
Drawbacks of Debt Financing
- Payback of both interest and principal regardless of whether business is bad or good
- Restrictions on how to use the borrowed money by lenders may occur
- There is a fixed term for borrowers to pay back the money with interest.
- Repayments of the loan start immediately.
- Possibility of losing assets placed as collateral when unable to pay back
- Regular f und drain from the business due to monthly repayment of the loan.
What is equity finance?
It is the process of sourcing funds for businesses through selling shares. Individuals or firms buy the share offered in exchange to become one of the co-owners of the business. Therefore, equity financing is when business capital is gotten through the selling of shares.
- The government closely monitors equity financing to ensure that while using the method, it will be done according to the law.
- Equity financing is needed when firms are in need of short term funds
- While trying to expand, it is normal for firms to opt for equity financing.
Major Channels For Equity Financing
- Venture capitalist- They are big firms or professional investors that give large capitals startup business.
- Personal finance - Providing money for the business yourself by selling personal assets or using personal savings.
- Family and friends - Fund the business in exchange to become one of the partners or have a share in the business.
- Private investors - Wealthy people who invest big capital into a business in exchange for profit sharing and equity.
- Government- They may offer grants for expansion of business, exporting, development and research and innovation.
- Crowdfunding - it is sourcing for money from a large number of people by requesting a donation or investing in a project or business idea.
Benefits Of Equity
- Loans are not paid back immediately, so the risk level is low
- There will be more available cash as it is not required to be paid back.
- Experts, skills are brought into the business by the shareholders or investors.
Drawbacks Of Equity Financing
- No longer the sole owner of the business
- Lose total control over the operations of the business.
- Lots of effort and time are involved in finding investors.
The risk and profit of business are highly dependent on their financial decision. When the funds provided for business are sufficient, it aids the business to pay dividends to those who invested in the business and at the same time make a profit. It is important to note that before debt finance loan is granted, the lender may request assets, which will be used as collateral, guarantor's form or SBLC (Standby letter of credit).