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  • Artificial-Leaf Inventor Slams New Energy Finance, Blames Universities
    Daniel Nocera has given up on the American system for financing energy startups. It brings innovations to market too slowly, he said in Chicago this month, in part because the system is rigged to make professors wealthy.
    By Jeff Mcmahon.  Forbes.  Sun, 29 May 2016 04:01:00 GMT.
  • Chris Christie Approves Financial Rescue Plan for Atlantic City
    The struggling seaside resort in New Jersey must meet several measures to avoid bankruptcy, or the state will take over, according to the legislation.
    Rick Rojas.  International Herald Tribune.  Fri, 27 May 2016 23:23:10 GMT.
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  • US Financial Markets Move Higher for Week
    The major stock averages traded higher Friday, with consumer discretionary and technology sectors leading the way, to close the week on an up note on very thin volume. ...
    Voice of America.  Fri, 27 May 2016 19:09:21 -0400.
  • Ukraine Files Defense In $3 Billion Russia Eurobond Case
    Ukraine has filed its defense with a British court over a $3 billion debt to Russia, arguing that the original loan agreement with its neighbor was invalid.
    Radio Liberty.  Fri, 27 May 2016 17:52:22 +0000.
  • Africa: Africa's Misery - a Mockery of Pan-Africanism
    [Financial Gazette] TODAY, misery characterises Africa, a continent ironically described by the World Economic Forum (WEF) as having "impressive economic potential".
    All Africa.  Fri, 27 May 2016 13:20:39 GMT.
  • G-7 leaders voice concern about emerging economies
    Group of Seven leaders voiced concern about emerging economies on May 26 as their host, Japanese Prime Minister Shinzo Abe, made a pointed comparison to the global financial crisis eight years ago
    Hurriyet.  Thu, 26 May 2016 13:05:00 +0200.
  • Student loan mis-sold, says graduate
    A graduate's complaint that his student debt has risen by £1,800 in interest in the year since he left university goes viral.
    BBC News.  Thu, 26 May 2016 12:51:47 GMT.
Money Tree Financing Concept Illustration
money tree financing

Financing Information

Financing is the activity, process, or instance of raising or providing funds for an enterprise (or the funds thus provided).  Financing transactions take place between a business and its investors (equity financing) or between a business and its creditors (debt financing).  Individuals also use debt financing for certain large purchases such as residential real estate and motor vehicles.

high interest rates
High Interest Rates

Equity Financing

Raising capital through equity differs from debt financing in that debt must be paid back with interest while equity involves giving away a portion of the company. Equity can take on various forms depending on the structure of the business, but always has a positive impact on the company's balance sheet and allows the business to retain cash flow. However, one of the biggest disadvantages of equity financing is that the founder's percentage of ownership is decreased with every fraction of ownership that is sold.

Corporations commonly issue common stock or preferred stock which may be retained until the investor decides to sell them or the corporation decides to buy them back. C corporations often issue common stock to founders, officers, directors, and initial investors, and may pay out dividends on these shares. Dividends are paid out of earnings and profits, and cannot be paid out unless the company is generating income. Common stock allows the holder the right to one vote per share on all matters decided by the shareholders. Preferred stock allow the holder to receive dividends before holders of common stock, but they must give up their voting rights in exchange for preferential treatment.

Limited liability companies (LLCs) issue membership units and allow their profits and losses to flow through to the equity holders (membership partners). Although there is often a manager, every membership partner of an LLC can fully participate in the management of the company, and must report any income or loss on their individual tax returns. Unlike a corporation, an LLC can issue an infinite number of membership units, but will usually choose to define a maximum amount to make the investment opportunity more attractive.

General or limited partnerships issue limited partnership interest to passive investors who do not wish to make decisions for the company. As with an LLC, limited partnerships do not have to limit the amount of investors, but often choose to do so. The general partner is not under any obligation to put out personal capital, and as such, the limited partners initially receive more of the net income for their investment.

Deciding how to raise capital can be a daunting task which requires much research and often the help of a lawyer or experienced financial planner in order to structure the right equity financing for the needs of your business.

Debt Financing

Many businesspeople use debt financing for their businesses for a variety of reasons. Debt takes less time to secure than equity, the cost of the principle and interest is readily measurable, and the equity of the company is not diluted by new ownership. However, there are some drawbacks to this type of financing, including the fact that the company is required to pay back the debt and it must carry the debt as a liability on its balance sheet. Introducing debt can also place an extra financial burden on the business, and small business owners may be required to pledge personal collateral.

One of the most common types of debt financing is through a bank loan. This can be obtained by presenting the appropriate paperwork to show that the business is creditworthy, including a business plan or loan proposal with detailed financial projections. Banks will usually require the owners of a start-up business to personally guarantee the loan. Interest that the bank charges will vary according to the type of loan and perceived credit risk of the borrower but should be deductible as a business expense.

The Small Business Administration (SBA) is another avenue through which to apply for a business loan. There are several loan options through the SBA, including the 7(a) loan guarantee program, the 504 program, the microloan 7(m) program, and other specialized programs for women, veterans, and minorities. The 7(a) program provides loans through commercial banks but guarantees them, providing financing to small businesses that would otherwise not be able to obtain it. The 504 program provides fixed-rate, long-term financing for small businesses to acquire land, buildings, or equipment through private, nonprofit corporations called certified development companies. The microloan 7(m) program provides small businesses with a short term loan of $35,000 or less for working capital, inventory, furniture, and other supplies.

Revenue participation or royalty financing is when an investor buys a portion of the future revenue stream of the company. It is considered a form of debt financing because these investors must be paid first before any of the company's other expenses. Revenue participation can be structured through preferred stock or LLC membership units.

Other common means of debt financing often utilized by small business owners include credit cards, home equity lines, retirement funds, and life insurance borrowing. Each of these options comes with varying degrees of benefit and risk and must always be treated as a loan and repaid within a timely manner.

With the wide variety of choices available, business owners seeking debt financing must do their homework, and if necessary, consult with legal and accounting professionals to ensure they make the best decision for their needs.

Financing Organizations and Links

Financing-related organizations include the
Securities Industry and Financial Markets Association, the Small Business Administration, the Commercial Finance Association, and the American Financial Services Association, as well as other, more specialized or localized, organizations.

One Hundred-Dollar Federal Reserve Notes Fall from the Sky

The following links include page titles and summaries for reference articles, directory pages, and captioned images about financing and finance-related topics.

  • Car Leasing
    Leasing a car is a popular alternative to taking out an auto loan. Learn about the pros and cons of leasing a car and find links to major automobile manufacturers.
  • Car Loans
    Many people finance a new car with an auto loan. Learn all about car loans and browse the directory of popular automobile makes and models.
  • College Loans
    With the expense of a college education, at least 20% of college students need some type of loan to help pay for their college education. Learn all about different kinds of college loans.
  • Debt Consolidation
    The goal of debt consolidation is to bundle all of your debt and help you pay it off more quickly. Learn all about your options regarding consolidation of your debt.
  • Mortgage Loan (Illustration)
    This dollar symbol leaning on a house illustrates the equity that many people have in their homes. In today's economy, many homeowners are seeing their home as an additional source of needed funds and are deciding to take equity out of their home.
  • Mortgaged House (Illustration)
    The concept of a mortgaged home is illustrated by a dollar sign overlaid by a yellow house with a red chimney. As home values have declined in recent years, second mortgages have become less available to underwater homeowners.

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