Financial Literacy Series - Topic 1: Mini Finance Glossary - Terms you should know before you start seeking funding

It helps when seeking funding to understand some key terms that the funding agencies will use. Like many professionals they have their own internal terms that they use when talking about your proposal as well as some basic concepts.

Working Capital vs Capital Funding

Working capital is used to cover your day-to-day operating expenses whereas capital funding is used for the purchase of assets and to provide equity for your business to grow. Understanding your need will help when it comes to choosing the funder to approach.

Short Term vs Long Term Financing

Short term financing is usually raised to cover the day-to-day needs of your company.  Long term financing is used to cover asset purchases and to cover the long-term growth of the company. Something to note, short term financing is usually done on a demand basis i.e., repayment can be asked for at any time for any reason while long term funding is usually done subject to terms and conditions attached to the advancement of the funding requested.

Loans (or conventional financing) compared to Investment

Loans comes with interest and repayment terms while investment has no interest due or repayment terms. From a cash flow perspective investment is better since there are no repayment terms. Although something worth keeping in mind, is that most businesses make the most money when the owner cashes out or sell their business. Since you retain 100% of the ownership under the terms of conventional financing, the owners receive 100% of the sale proceeds. Under investment you have already given up a percentage of the business’ ownership and a significant portion of the future value of the business.

Factoring – a type of conventional financing – is where a company sells its accounts receivable to a third party (a factoring company). This is usually used to help your immediate cash flow needs.

Capital Lease – is a contract where the leasing company receives payments towards an asset in exchange for operating control over the asset. Once the last payment is made, the lessee becomes the owner of the asset; this is often easier than getting a loan for a capital asset.  

Venture Capital (VC) – form of private equity financing – when a firm or a fund provides financing to an early stage or emerging company that have been considered to have high growth potential.

Franchising – form of financing – used for businesses with the potential to grow quickly. The franchiser charges the franchisee an annual fee to have the right to use the name and processes while still maintaining control over the concept and the franchisee must pay for the expansion.

Check back here next Tuesday for topic 2: 6 Key Pieces of Advice When Looking for Funding.