- Many businesses use financing to expand business operations or cover new business opportunities. As with many business situations, financing carries a certain level of risk. Business owners and managers are responsible to secure financing that limits the amount of risk taken on by the business. Debt and equity are the most common forms of financing. While bank loans represent the traditional debt financing, private investments from firms or venture capitalists are types of equity financing.
- Cash flow is the money coming into and going out of the business. Financing increases the amount of a company's cash outflows. Financing typically requires companies to make monthly cash repayments or large periodic quarterly payments. Expanding business operations or new business opportunities must be able to generate enough capital to make these payments. Increases in business operations with no additional financial benefit can strain a company's current capital levels.
- Banks and lenders usually dictate the loan terms for business financing. Newer or small businesses may be in a poor financial position that will create unfavorable loan terms. High interest rates, short loan lengths and the release of financial statements for lender review are a few loan terms businesses may face. Banks and lenders can also require significant credit checks or other financial reviews for businesses. While investors may not require copious amounts of paperwork, they can force business owners to give up a percentage of ownership in the business for investment capital. This forces business owners to allow investors a say in management decisions.
- Businesses may need to provide banks, lenders and investors with collateral for financing. Collateral represents buildings, equipment or inventory. If a business defaults on financing agreements, collateral may be given as repayment for the outstanding balance. This can prevent the company from conducting business in the economic market. Businesses will also lose any cash relating to the loan, which can be difficult to recover if the business has no assets for producing goods and services.