Types of Capital Products
One of the first things to consider when starting the process of getting funding for your business is what type of capital product will best fit your needs. This might seem obvious, but to fully take advantage of your business borrowing potential, it’s important to get the type of capital which best fits the intended purpose.
The signature characteristic of a short-term loan is the shorter amount of time the money is outstanding. These types of loans are meant to address short-term initiatives, ongoing access to working capital and onetime expenses that are best repaid over a shorter term. Types of short-term loans include line of credit, revolving facility, revenue based loans, and a merchant cash advance.
Examples of uses for short-term capital include, marketing campaigns, seasonal inventory, accounts payable, expansion soft costs or to solve a problem that is impeding growth or profitability. Short-term amounts range from under $100,000 to $1MM with repayment time frames counted in days or months. More capital can be attained depending on the business and the use of funds.
Mid-term financing products are best used for larger expenses and have a value or return in keeping with the repayment term, such as a equipment. Mid-term financing is most effective when the equipment or asset acquired depreciates over time, meaning replacement or upgrade is usually required. By keeping the term in line with the useful life of the equipment, when replacement is needed there is little or no debt outstanding.
Mid-term loans can also be useful for consolidation of debt, repurchase of equity or partner buyout, and substantial facility renovations or improvements. The pay-off period for mid-term loans is typically between 3-10 years and loan amounts vary in keeping with the scope of the business and collateral.
The best use for a long-term loan product is for an asset that will more than likely appreciate over time. Examples of this include; real estate, the purchase of a competitor or other business, or substantial capital for equipment or improvements.
Long-term loan amounts vary greatly based on different factors such as the asset value securing the loan, the business’ ability to service the loan and business credit profile. As the name suggests, long-term loan products are paid off on a longer time range, usually 10 years or greater.
Choosing the Best Fit Financing Product(s)
Because there is a limit to how much debt is available to a business, it is very important that the correct capital product for the intended use is selected. Some key questions to ask:
· What will this capital being used for?
· Over what time frame will the business realize benefit from the borrowed capital?
· What is the likely return to the business and over what term, including debt expense?
· How quickly can the business realistically service and repay the debt? Shorter repayment can lower total expense and restores borrowing capability sooner.
· What additional capital and type is going to be needed in the near term to achieve the goals of the business?
Once this is determined it is much easier to identify the financing product(s) which best suit your business’ immediate and longer range initiatives.
Business debt properly utilized can be a strategic advantage in what is an increasingly competitive business environment. A solid understanding of the financing options available can lead to better financial planning. Utilizing a balance of short, mid, and long-term finance products is a key component to a growing and prospering business.
If you are unsure of your business borrowing capabilities and would like to review your current debt structure, or if you have plans for growth reach out to a CPN Affiliate or contact CPN directly at 866.277.7626