Solved: Sources of Financing Explain the differences in the three types of capital

Types of financing and their differences

1. Bank – Debt Financing or Bank Loans

Banks offer short and medium to long term loans to business entities. Short-term loans are usually given to well-established businesses for up to 6 months and could be hard for start-ups to obtain.

Medium to long term loans is provided to new businesses for anywhere between 1-20 years. They are also called Term loans and are costly as compared to short-term loans.

2. Non Bank or Asset based lending – Loans are provided against the assets of the business/es. They are not regulated and may allow higher borrowing capacity as compared to banks.

3. Govermental – Federal and state governments provide assistance in the form of grants and loans or tax-credits for new start-ups or for expanding operations.

The decision to purchase a location and lease a location may alter the financial structure of a small business start-up in many ways.

• The initial outflow of cash is less in the case of leasing than it is for purchasing. Leasing does not tie up your funds from purchasing real estate
• Purchasing gives you the appreciation value of the property
• In the long term, you end up paying less if you purchase as compared to leasing a location.