Island Savings

Capital Need & Sources

No matter the size, every business needs capital to get started and to continue operating. Learn more about the four basic types of financing you should be aware of to help your business succeed.

 

Financing your new business

  • Equity or Shareholders' Loans: These types of loans are generally provided by investors at the start-up or expansion stages for those businesses with perceived long-term growth potential. Equity is money paid in exchange for partial ownership of the company with no obligation for repayment as the investor has bought a share in the profits. A shareholder loan, however, is money loaned to the business by a shareholder and will require some form of repayment. Both equity and shareholder loans create leverage which is the ability of the business to grow and/or attract other loans and investment.
  • Capital asset financing (Term Loans): Term loans are used to purchase fixed assets required by the company, such as property, office equipment, vehicles, etc. A percentage of the value of the assets purchased then acts as security against the loan until it is repaid.

EXPERT TIP

Lenders invest in a business based on, among other factors, your financing plan. Resist using a term loan to cover wages or inventory costs, so that you maintain the confidence of your investors.

  • Operating loans are used to cover wages, rentals, inventory costs and other expenses in advance of collecting revenues to pay them. The lender will use a percentage of your accounts receivable as security against an operating loan. Operating loans are essentially a series of pre-approved, monthly 'term loans' that save you from having to constantly negotiate new loan terms.
  • Bridge financing is a form of loan intended to 'bridge the gap' between the due date of a payable and the date a specific receivable is anticipated. The receivable itself is the security for the loan. Bridge financing is typically reserved for low-risk situations.

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