How to choose the right financing
No matter how well established your business is, your projects still have some level of risk. By understanding the risk your project represents, you’ll be able to focus on getting the right type of financing.
Here are some examples of types of financing you might want to consider depending on your level of risk.
Lower risk—classic loans
If your business has a track record of profitability, predictable cash flow and assets that can be used to secure a loan, you can expect to get what may be called “classic loans” such as:
- Line of credit, which is credit with a predetermined limit
- Term loan, with regular payments of principal and interest for the term of the loan
- Mortgage, which is a loan secured by a piece of real estate
Medium risk—mezzanine financing
You should consider mezzanine financing if you are a higher risk for the lender. For example, your business might need money because it’s growing rapidly but has limited assets to secure a loan. Alternatively, your business might need mezzanine financing to complete an acquisition or the transition from one owner to another.
This type of financing is still a loan that you must repay, but will have different features. These include the following:
- More flexibility, such as the possibility of having a customized repayment schedule
- Higher interest rates, reflecting the higher risk associated with this type of loan
High risk—equity financing
If your project represents even more risk, equity investments, which involves selling a piece of your business to investors, might be the only option available to you.
While adding a partner to your venture has many benefits, you should be careful about selling a portion of your ownership if you do not need to do it.