Every financing and funding option on the market right now

Financing is amazing, but only if you understand what your options are.

That is why in this article, we lay out all the different types of financing we know of that exist, and list the typical requirements for each type of financing. Keep in mind that these are not all available through Leland. Some may even be some very hard to find providers for.

Having a hard time deciding which one is relevant for your business?

Here’s a quick overview:

You can use the list to navigate to the subject you care about.

In this article, we’ll cover the differences between these financing strategies, how to apply for them, and what the typical requirements are for each.

Bank loans.

Bank loans are probably the first thing your company thinks about when they are thinking about raising money.

The benefits are clear, especially compared to the other most prevalent way of raising money: venture capital. With a bank loan you don't have to worry about a third taking a piece of your company and control away from you.

The way a bank loan works is simple:

  1. When you apply for a bank loan, you specify the amount of money you need and why you need it.
  2. The bank will then assess your credit score, your history and company revenue and potentially a few other variables.
  3. The bank will also request some type of collateral to reduce risk.
  4. After the bank has done their analysis, they will use the information to determine:
    1. your rates
    2. How much money you can borrow
  5. Once your company gets the loan, it is paid back over time according to the agreed payment scheme.

This way of working is very straightforward and makes it simple for a company to obtain additional funds. The downside is, of course, that the bank and usually only takes into consideration surface level information. While a bank may still hire experts to assess your business, their perspective is different and superficial.

When your company becomes bigger, however, a bank will become more flexible to work with.

Overdrafts.

Where a bank loan is usually obtained with a specific purpose in mind, an overdraft is different.

With an overdraft a bank simply allows your company to use more money than it has, which then has to be paid back, of course.

What overdrafts do is reduce the impact of internal cashflow limitations, at least short term.

The way you obtain an overdraft for your company is straightforward. It's important to realize that an overdraft costs money when you use it, so applying for an overdraft does not cost anything, with the exception of the potential renewal fee you'll have to pay often annually.

  1. you apply for an overdraft with your bank
  2. The bank will assess whether or not you would be able to pay for an overdraft of a certain amount
  3. Using their assessment, they will determine the time frame in which you will have to pay back any overdrafts as well as the interest rates you'll have to pay
  4. Only when you use your overdraft capabilities, you will have to pay interest
  5. The borrower pays back the money plus interest and expenses

Just like with a bank loan, over that will be made available to you depending on your credit score and spending habits.

Overdrafts are usually more expensive than a bank loan but are, of course, more flexible.

Venture capital.

Compared to the previous two, venture capital is completely different. Venture capital is a good way to raise money for your company and doesn't necessarily rely on your credit score or financial performance.

Instead, venture capital will rely on the characteristics of your business and the industry that you are in to determine how much money you could acquire.

In this case, your funding partners will take an almost personal interest in your business. While some of the same elements will still play a role compared to a bank loan, the way you run your business is often an equally important variable.

It is for this reason that venture capital can also be used for businesses that do not yet have a track record.

Of course, keep in mind that many of these investments are driven by the venture capital firms own from personal goals.

The way a venture capital deal comes to fruition often changes between every transaction, but there is a common process:

  1. The company reaches out to investment firms. These kinds of companies could be business angels, private investment groups, or large funds looking for alternative investments.
  2. The first step is usually a presentation followed by a conversation. The company first provides an overview informed of a slide deck, and if the venture capital firm is interested, they will invite the company for a presentation.
  3. What is most important for the venture capital firm is usually whether or not they understand the industry in which the company operates, how the company operates, and why it needs money.
  4. At this point in time the agreement and structure will diverge between deals.

Note that most venture capital firms will have growth as a goal, at least on the surface. While there are certain industries that are often included in a firm's portfolio because it is part of their goal to have companies in that industry enlisted with them.

Your successful to venture capital firm will rely on your ability to demonstrate whether or not they can expect growth, as well as their ability to understand your company and the industry that you operate in.

Friends and family loans.

While not an official way to obtain funds for your business, it is a very common approach. This is of course only relevant for smaller companies with very few employees, and it requires your family to buy into your vision of your company.

But, especially for starting companies, using friends and family for loans can be a good way to get started.

Make sure to be careful when you do so, however. an underperforming business may end up ruining your relationships with your friends or family.

Factoring.

Factoring is a very specialized and very common solution used by many companies in many different industries.

Factoring often relies on the providers ability to understand your industry, in that usually means that the provider of the factoring service will often focus on one or two industries.

The way factoring works changes slightly between providers, but in general it is a way for a company to raise money short term, even consistently, without needing to loan that money.

While there are exceptions, and these exceptions depend on the modalities of the factory agreement, factoring literally allows you to sell open invoices two a third party who will then pay you up front for a part of the total amount.

Factoring is fairly straightforward as well, and it pays off to structure your payment terms and invoicing terms with your customers with factoring in mind if you intend to use the service.

  1. A company applies for factoring, either regularly, or one time.
  2. After having applied for factoring, the factor will often verify your customer's credit score and present you with the transaction agreement.
  3. Your company gets paid within a few days.
  4. When your customer has paid the amount in full, the factor will pay the remainder out to your company minus their fee.

This can often be done on a regular basis, and even be done for every invoice you send out. Many factoring companies will also do regular credit checks for your customers.

The cost of factoring varies significantly between industries and providers, as well as the market.

Revolving loan facilities.

An overdraft is usually offered by your bank and your bank might also be able to offer revolving loans. But, in addition to your bank revolving loans are also available with private lenders.

The comparison between an overdraft and revolving loan is easy to make, in fact an overdraft is a form of a revolving loan. The difference is that this revolving loan is not tied to your bank account and usually term limited.

In addition, the revolving credit line or the revolving loan is something that is often offered by specialized parties. That means that these funding parties or either specialized in structures like revolving credit or are specialized in offering financing two companies in specific Industries or with specific problems.

Compared to a normal credit line, the revolving credit line is different in that once the loan is paid back, the credit remains open for use.

  1. You apply for a revolving credit line either with your bank or with a private lender.
  2. The financing provider will assess the application according to their own criteria. These criteria differ for different parties and depending on their specialization maybe stricter or focused on different areas of your business.
  3. The lender specifies the payment terms. In some cases, the borrowing party may pay back the borrowed amount in installments as specified in the agreement with the lender.
  4. When you use your open credit, you will be charged with interest payments.
  5. the borrower then pays back the old amount according to the previously agreed payment schedule.

A revolving credit line is a powerful tool for any company. It is there when you need it, and its main benefit over overdrafts is that a company can shop around to find the revolving credit line with terms that matches their needs the most.

In addition, and this is the case in this with all private lenders, the revolving credit line from a private lender may introduce a new partner to your business who also takes a personal interest in your business’ success.

Letters of credit.

While letters of credit can be expensive and are not a typical loan, the value to your business is their ability to instill confidence in your suppliers.

You will not get a letter of credit if the bank or the provider of that letter of credit does not believe that you will be able to pay the amount for the credit. often that means that a bank will look at your bank account or multiple bank accounts and assess whether or not your company can afford the payment.

In that sense, it is not alone at all.

However, if the company is unable to complete the payment, the issuer of the letter of credit will have to pay the amount in full and the company that was covered by the letter of credit will have to repay that amount.

The best way to look at it is that the letter of credit leverages the bank’s or the issuer’s standing for you to be able to purchase what you need.

If the supplier to the company trusts the bank or the institution issuing the letter of credit, the transaction is easily completed.

In a sense, you are borrowing the issuer’s credibility.

In addition, specifically for large transactions, this allows a company to collect the funds needed from different sources owned by the company And proves to the seller that they will be able to make payment.

A letter of credit is great tool when there are uncertainties whether or not the transaction can be completed.

Purchase order financing.

Purchase order financing allows companies to leverage their purchase orders and the contracts that bind the two parties together.

It is a highly specialized and often industry specific solution that solves 1 specific problem:

When a company receives a purchase order that is too large so it cannot afford to pay suppliers In order to fulfill the purchase order, it needs additional capital. Purchase order financing is designed specifically for this problem.

When leveraging your purchase orders, the lender will purchase your supplies for you so that you can complete the transaction.

Of course, purchase order funding brings with it an expense, but it's a value isn't simply the fact that your company is able to fulfill a large order. Instead, especially when your company can expect more large orders like this in the future, it allows your company to build trust with an often larger client than usual.

The process for getting purchase order financing is as follows:

  1. The company applies for the funding.
  2. The lender will then assess a range of variables all relevant to the transaction. These variables include but are not limited to:
    1. The underlying contracts related to the purchase order
    2. The relationship between the supplier and the company borrowing the money
    3. Past performance of the supplier
    4. Creditworthiness of the final customer
  3. If approved, most often the lender will purchase the supplies directly from the supplier and arrange their delivery in cooperation with the company.
  4. When the transaction is completed the lender is paid in full plus a fee.

One of the most critical components of this transaction is the contract that underpins the purchase order. The ability of the customer to get out of that transaction is an important factor to determine the risk of the transaction for the lender.

In general, as it is with most of these alternative financing strategies, reducing the risk for the lender usually also reduces the final fee.

It is therefore a good idea to construct your contracts and your purchase agreements with the purchase order financing option in mind.

Important note: purchase order financing does not work with companies who still need to perform work on the supplied product. The funding partner will require as much control over the transaction as possible. Any production or assembly that needs to happen after the supplier has delivered the product increases the risk of failure.

Therefore, for manufacturing companies work in process financing is the better, and often the only,  option.

Work in process financing.

Work in process financing is very much like purchase order financing.

The difference lies in the fact that for the lender, the scope of the transaction can be a lot wider. With work in process financing, it is perfectly possible to have the lender finance the purchasing of the product as well as the work that needs to be done.

Purchase order financing already requires a certain amount of industry knowledge from in the lender.

Work in process financing takes this to an entirely new level. With these types of transactions the lender will have to have significant industry knowledge to be able to understand the risks involved with the transaction.

Because of this there are steps added to the process and the scope of the type of companies that these lenders will be able to work with is usually a bit narrower with very specifically requirements for the company borrowing the money.

The process is very similar to purchase order financing with a few added steps:

  1. The company applies for the funding.
  2. The lender will then assess a range of variables all relevant to the transaction. These variables include but are not limited to:
    1. The underlying contracts related to the purchase order
    2. The relationship between the supplier and the company borrowing the money
    3. Past performance of the supplier
    4. Creditworthiness of the final customer
    5. The production process
  3. Most often, the lender will perform a site visit to inspect the production facility.
  4. If approved, most often the lender will purchase the supplies directly from the supplier and monitor the process of being worked on during production.
  5. When the transaction is completed the lender is paid in full plus a fee.

There are very few companies out there who offer work in process financing because of this need for industry specialization.

The primary benefit of work in process financing is the fact that companies can use the funds to expand beyond their normal capacity and growth of company even further.

Merchant cash advance financing.

Merchant cash advance loans use your regular revenue as a guide to determine how much money you can loan. The lender will use this regular revenue as a means to estimate their risk.

That means that merchant cash advance financing or MCA financing is often fairly easy to obtain, as long as you have regular revenue.

It is worth to note that merchant cash advance financing is often associated with a risky deal for the borrower. It is true that merchant cash advance financing is often fairly expensive, but that does not mean that there's no value.

Regardless many financing providers do not like to offer this form of financing. Oftentimes the ones who do, are specialized.

Loans obtained through merchant cash advance financing can often be paid back in just a few months.

Equipment financing.

You could go to a bank to finance new equipment, but equipment financing itself is a very specialized form of financing. This service is specifically designed around the financing of new equipment for companies who need it but cannot afford to purchase it outright.

A bank loan can of course achieve the same result but usually does require a significant down payment and qualifying for a loan can be more difficult, especially when your credit is low.

With equipment financing, this problem no longer exists. Equipment funding takes the equipment itself and uses that as collateral. In some cases using equipment financing also gives a company certain tax benefits.

Often, equipment financing companies will allow you to finance a whole slew of difference pieces of equipment, ranging from cars to furniture. But, there also exist companies and specialize in certain industries like construction.

An added benefit is of course that using an external party for your equipment financing means that your current bank lines are not affected at all.

While getting equipment financing is fairly straightforward, there are a few requirements that often have to be met:

  1. Some equipment financing providers or lenders will still require a credit score above 650
  2. Your business typically has to be in business for a while with a proven track record, often more than a year.
  3. Some equipment financing lenders will be able to fund your equipment even if you have a credit score below 650. At this point in time your cash flow becomes more important.

In principle, if your business does not have a high enough credit score, most companies will still be able to work with you, depending on how your company has performed in the past and is continuing to perform right now.

Credit lines.

Credit lines are the non revolving version of the revolving credit. The mechanism remains the same, where a company gets access to capital and can use that capital sometimes for specific purposes only, but use it at its own will in when it needs it.

The difference with a revolving credit line is the fact that a credit line like this does not renew after complete value of the loan has been paid back.

In some cases a credit line maybe the vehicle of choice for an investor of a venture capital firm as well. But this does not have to be the case.

The main benefit of a credit line versus any other loan is the fact that credit lines are more flexible, albeit more expensive.

An important thing to realize is that credit lines more often than not have a variable interest rate. This could have a significant impact on the cost of using your credit line at a certain point in time.

Unsecured business loans.

While a secured loan or a normal loan uses collateral to provide extra security to the lender and reduce their risk, an unsecured business loan doesn't require any collateral at all.

Under this construction, this means that the unsecured business loan is a potentially flexible solution for many businesses with one downside: the cost.

An unsecured business loan is obtained in exact same way as a normal business loan:

  1. For an unsecured loan, you specify the amount of money you need and why you need it.
  2. The lender will then assess your credit score, your history and company revenue and potentially a few other variables.
  3. After the lender has done their analysis, they will use the information to determine:
    1. your rates
    2. How much money you can borrow
  4. Once your company gets the loan, it is paid back over time according to the agreed payment scheme.

Just like a standard business loan, the interest rates of an unsecured business loan are usually fixed. The difference is that the interest rate is usually significantly higher. That said, depending on your credit score, this may not be the case at all.

As is the case with all funding, reducing risk is key for the lender. If your company can in any way ensure that the risk of the transaction is lower on the side of the lender, that usually means reduction in cost on your end as well.

Working capital loans.

Working capital loans differ from normal loans in terms of their intended use. Typically, one would see that a term loan or a normal loan is usually requested for a specific investment, oftentimes with value extending into the long term period

This is not the case with working capital loans. In this case the use case is short term usage for things like business expenses wages and other typical day to day expenses that a business has to deal with.

Obtaining a working capital loan is the exact same process as a normal loan.

As is obvious by now the risk profile changes for the lender, which means that the cost structure will be different. This usually also means that the payment terms or the length of the repayment is going to be different from a normal loan, as will be the interest rates.

Working capital loans are very similar to a credit line, but here as well there is a difference in use cases.

Crowdfunding.

Crowdfunding is completely different from anything else here. It will also only be applicable to a limited number of businesses. Typically crowdfunding is meant for businesses who do something innovative, new, or risky.

With crowdfunding, your company registers on a website like go fund me and explains the project or the reason you need your funding. Note that this is not limited to companies But is often also used by individuals.

When your account gets published, people will get to pay you small amounts of money in exchange for what is called “perks”.

This type of funding typically works very well for something that is consumer focused, high volume, and relatively unexpensive. This does however require your company to do some extensive marketing regarding your crowdfunding campaign.

Companies have raised millions of dollars using crowdfunding, but often only after an extensive marketing campaign.

What is interesting about crowdfunding, is the relative low risk for all parties. If something were to go wrong with the delivery companies are less likely to get in trouble through crowdfunding. At the same time the only repayment a company often has to do is some sort of product delivery. For the consumer, it means they get the product they wanted and the lower price and if something goes wrong they usually only lose a small amount of money.

Crowdfunding often only charges a fraction of the total value of the final product upfront and gives backers a chance to purchase the final product at a lower price later on. It is for this reason that crowdfunding is often also used to gauge market interest.

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