Posts

EduFi: Let's Learn About Financing Your Business With Debt

avatar of @d-zero
25
@d-zero
·
·
0 views
·
3 min read

@khaleelkazi wrote about having more diversified content on LEO. Now I've had no college degree in business. I've learned my lessons in the university of World Wide Web. I thought of brining my Hive-LEO audience along with the some of the stuff I've come to learn. Don't think of these as financial advise. I'm doing what I can to share more knowledge and increase financial literacy.

Getting Into Debt

  • Debt is money that has been given to you to use, that must be repaid; typically along with interest.
  • Debt confers no ownership interest therefore no right to participate or have a say in how a company is operated.
  • Debt is a legal obligation/contract.
  • Failure to repay debt can cause legal consequence, which might include losing control of the company, or ultimately bankruptcy
  • Bankers want to avoid risks and make most profit for their shareholders
  • This leads us to credit risk

What is Credit Risk?

  • All financial institutions seek to minimize risk of default.
  • This is based on the credit risk of the borrower.
  • Credit/Default Risk is the risk that the borrower will not repay the loan and interest on time and in full.

As a result, we have:

  • Secured vs. Unsecured Loan
  • Secured loans have less default risk than unsecured loans

Covenants

  • Loans with covenants have less risk than those without

Few Notes On Term Loans

  • It's a contractual agreement to repay money over a specific period of time at a specified interest rate
  • Most often repaid monthly from cash flow
  • Term loan is secured by assets or a personal guarantee
  • Banks are major source of business loans
  • Amount of the loan, time period, repayment terms, and interest
    payable are all open to negotiation and agreement
  • Interest only paid on amount drawn
  • Inexpensive to set up and very flexible for small businesses
  • Can be fixed rate (interest rate stays the same for the term of the loan), or floating rate (interest rate fluctuates with changes to the prime rate)

Notes On Mortgages

  • Mortgage is a type of loan that is secured on an asset, typically property

  • ▪ Banks, insurance companies, pension funds lend to businesses on this basis -Typically has term of 10-20 years or even 30 years

  • It's a long term debt

Line of Credit (LoC) AKA Revolving Loan

  • Used by 75% of all small business owners
  • Used primarily by small business to fund Accounts Receivable and Inventory purchases
  • Can be unsecured, but usually secured by company assets, and personal guarantees
  • Banks would ask for forecast cash flow statements from the business
  • Inexpensive to set up and competitive interest rates offered

A/R Factoring (This Seemed Like A Cool Idea To Me)

  • The factor takes over the invoicing and A/R collection for a business.
  • The factor typically advances 80% of the approved A/R to the business in 24-48 hours.
  • Some businesses might do this to meet its present and immediate cash needs
  • This might becoming a thing of ancient history thanks to crypto :)

If you need to learn more some of this might helpful with pros and cons:

Credit Cards (I'll Keep this Short)

  • Similar to loan, but not tied to any particular asset
  • No repayment schedule; only minimum payment
  • High interest
  • Cool way to get perks, points, cashback and tons of other cool things
  • Self-employed can count a business

Supplier Credit - Bank-less Loan

  • Provide credit on both physically assets (e.g. purchase of equipment for your business) and actual supplies purchased.
  • Can be very accommodating for new businesses’ but remember that it’s a liability for the company.
  • Might also tie the company to one supplier and limit the ability to shop around for less expensive option.
  • Interest rates can be more competitive than bank sources.

Hope you liked the part 1 of EduFi series. Don't take any of these as your study notes. They could be good notes. But they are more like personal notes. I'll see if I can make this a daily series. Always do your own research. Page dividers are from @krunkypuram

Posted Using LeoFinance Beta