Finance Topics
IN THIS LESSON
To be a successful business owner, it can be important to have access to funds...
… to either launch a new venture or to keep your existing business operating smoothly.
In this interactive video, you will learn how to obtain long-term and short-term financing for your business needs.
Find out more!
Video Transcript
When seeking the $20,000 funding for your new oven, you may choose to use long term financing. Meaning, any funding that will take you more than one year to pay back. There are four main types of long term financing you might use, owner's equity, retained earnings, bank loans, and leasing, or a combination of several of the choices. Number one, owner's equity. As owner of the bakery, you could use your personal money to fund your purchase needs, increasing your equity in the business.
You could invest $7,000 to fund part of the oven's cost. The downside is that it can be a great personal risk and might take some time to get that money back out of the business. Number two, retained earnings. Retained earnings are the part of your net profit that is reinvested back into your business. Using retained earnings can be a good way to fund your business because you're not taking on additional debt and do not have to pay interest.
The risk is that you now have less cash in the business, and you may need that money for an unexpected expense or when the business is slow. Number three, long term bank loans. Long term bank loans are an important option for obtaining business financing, but your business must qualify to get this funding. This option is great for purchasing long term assets and has lower interest rates than many short term types of financing. Number four, leasing.
Another long term financing option that is growing more popular is leasing. Instead of purchasing the brand new oven for $20,000, you enter into an agreement with a leasing company and agree to pay a monthly fee. For example, a thousand dollars per month in exchange for the use of the oven until it's paid off. The main benefit of leasing equipment is that you don't have to tie up a large amount of cash by buying the oven outright, yet you're still able to use the new oven and meet your sales demand. However, leasing also comes with drawbacks such as down payment and very high interest rates.
Often, owners will combine a number of long term financing options to make larger purchases such as using owner's equity for the down payment on a leasing option. Now that we've examined four main long term financing options, let's put them to work for you.