- Short term;
- Term money, and-
- Equity capital.
Keep in mind that the purpose for which the funds are to be used is an important factor in deciding the kind of money needed.
But even so, deciding what kind of money to use is not always easy. It is sometimes complicated by the fact that you may be using some of the various kinds of money at the same time and for identical purposes.
Keep in mind that a very important distinction between the types of money is the source of repayment. Generally, short-term loans are repaid from the liquidation of current assets which they have financed. Long-term loans are usually repaid from earnings.
Short-Term Bank Loans-
You can use short-term bank loans for purposes such as financing accounts receivable for, say 30 to 60 days. Or you can use them for purposes that take longer to pay off-
Such as for building a seasonal inventory over a period of 5 to 6 months.
Usually, lenders expect short-term loans to be repaid after their purposes have been served:
For example, accounts receivable loans, when the outstanding accounts have been paid by the borrower's customers, and inventory loans, when the inventory has been converted into sellable merchandise.
Banks grant such money either on your general credit reputation with an unsecured loan or on a secured loan.
The unsecured loan is the most frequently used form of bank credit for short-term purposes. You do not have to put up collateral because the bank relies on your credit reputation.
The secured loan involves a pledge of some or all of your assets. The bank requires security as a protection for its depositors against the risks that are involved even in business situations where the chances of success are good.
Term Borrowing-
Term borrowing provides money you plan to pay back over a fairly long time. Some people break it down into two forms:
- Intermediate: loans longer than 1 year but less than 5 years, and
- Long-term: loans for more than 5 years.
However, for your purpose of matching the kind of money to the needs of your company, think of term borrowing as a kind of money which you probably will pay back in periodic installments from earnings.
Equity Capital-
Some people confuse term borrowing and equity (or investment) capital. Yet there is a big difference.
You don't have to repay equity money- it is money you get by selling a part interest in your business.
You take people into your company who are willing to risk their money in it. They are interested in potential income rather than in an immediate return on their investment.