Financial forecasting can help businesses to calculate the potential revenue or loss and manage the funds logically in view of that. It can simplify the decision-making process, by assessing the marketing efforts of the recent past and figuring out whether they were worth the cost. Forecasting also helps to understand cash flow in a simpler way, and estimate the sales and probable profits.

Basic Models of Financial Forecasting

There are a lot of different approaches to forecasting business growth, but all of them use any of the following three models.

• Extrapolation – This method analyzes historical revenue data in order to calculate the prospects of the business. It uses a time-series method of quantitative forecasting where the data is collected over a defined period to identify future trends.
• Regression/Econometrics – This method employs a statistical procedure to forecast business growth. The main technique here is to evaluate the relationship between the dependent and independent variables that usually lead to revenue generation.
• Hybrid Forecasting – This method takes practical aspects into account to predict the growth of the business. Instead of using data and statistics for estimating potential sales and revenue, this technique uses knowledge-based forecasting to provide more accurate results.

Before choosing any of the said models for financial forecasting, you need to carefully review the company balance sheet to understand what assets and liabilities you have as of date. Moreover, have an idea of the last year’s expenses as well as the expected costs for the upcoming projects and promotions. Once you have those details ready, get in touch with a financial advisor to select the right forecasting approach for your business.

Remember that the varying state of the economy and the rising competition in the industry can be big factors that can affect the metrics of your forecasting. Then there is the ever-changing technology and seasonal cycles as well; how well you adapt to such things can have a great impact on the financial forecasting for your business as well. Still, with proper financial forecasting, you can always be prepared for any unexpected decline in the business turnover.

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It is to be noted that the loan amount will be lower or equivalent to the total cost of the equipment in the market. Hence, you can be relieved that you will not have to pay an amount that is much higher than the current market value of the equipment. Plus, the equipment piece will be fresh or brand new, unlike a leased product. Therefore, maintenance and repairs will be much lower.

Moreover, you will have to repay the loan amount with interest within the lifespan of the product. Once you are done with the repayment following every term and condition, you will get its ownership.

The Pros

• Easy to qualify.
• Relatively low cost.
• Does not require collateral.

Cons

• Require down payment in some cases.
• You will have to purchase the equipment.

Equipment Lease

When it comes to equipment lease, you cannot own an equipment piece by leasing it. Here, the owner of the equipment rents it out to others on a contract basis. Hence, you will not get complete ownership of the product outright in this case. However, at the end of your lease period, you can decide whether to terminate the lease, renew it, or purchase the equipment. There are mainly two types of leases; operating lease and capital lease.

Operating lease: This is one of the best leasing options available, since the monthly payments will be comparatively low in this case. Besides, the business owner will get a chance to own the rented piece of equipment at the end of the lease period. For this, all you have to do is to pay the current market value of the equipment. Unsurprisingly, this type of lease is also known as fair market value lease.

Capital lease: Unlike operating leases, capital leases impose higher monthly payments and are crafted more like business loans. Nevertheless, the business owner will get an option to buy the equipment piece at the end of the lease period either by paying 10% of its purchase value or a nominal value like $1. As a result of the structure of capital lease, it is sometimes indistinguishable from equipment finance.

The Pros

• No need of collateral or down payment.
• The application process is quite easy.
• Flexible terms and condition.
• Repairs will be on the lender.

Cons

• Lease amount can go higher than the product price.
• Lease amount will depend on your income, age, annual revenue, etc.
• The lease amount will be decided by the lending company.

In simple words, equipment finadncing will be like buying a house on EMI basis and equipment leasing will be like renting an apartment.

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In this case, your business enterprise can buy a piece of equipment from a lending company on a loan basis. Here, the equipment will act as your collateral. That is, you will get the complete ownership over the equipment once you repay the full loan amount to the lender on time. In other words, your equipment will buy for itself or you may repay the loan amount by making a profit using the equipment.

On the other hand, equipment leasing is a contractual plan. Here, you can rent an equipment piece from its owner for a certain period. The lease amount shall be paid at regular intervals until the expiration of the contract. However, you will not get ownership of the business equipment during the leasing period.

Even though both these options will be ideal for every business scale, these will be especially useful for startups and low-budget firms. Furthermore, you can consider these options when you plan to expand your establishment on a budget. The type of equipment piece that you can finance or lease includes machinery, furniture pieces, computers, printers, company cars, kitchen appliances, HVAC units, etc. This, however, depends on the type and overall turnover of your business.

Usually, it will be really challenging or impossible for a small startup to finance all above-mentioned factors altogether using their own capital. This is when most people think about equipment finance and equipment lease since both options let you acquire your business equipment instantly. Still, both these options are structured in different ways. While the former is similar to business loans, the latter is more like a rental agreement. It is quite natural for you to get confused when it comes to choosing the right option. In order to help you out of this dilemma, a quick comparison between equipment finance and lease is given below.

Equipment Finance

As mentioned earlier, you will get the opportunity to own an equipment piece right away even if you do not have a budget to afford it by means of equipment financing. Here, a lending company will back you with the cash to purchase your desired business equipment piece and you can repay it on a periodical basis. The total value of your loan, as well as the repayment period, will depend on the type of equipment you are purchasing.

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One of the most common misconceptions in the real estate business that keep new investors from entering the field is that you need to have a decent working capital with you as you get started. Actually, many beginners are unaware of the fact that there is an overwhelming number of financing options when it comes to the real estate business. However, it is extremely significant to understand the financing concept in this case, since the way which a particular deal is funded can directly reflect on its outcome.

As an investor, you must first understand the different types of financing options as well as their pros and cons. Keep in mind that not every financing option is equal and the one that worked for your co-investor might not necessarily work for you. The trick here is to understand the right financing option that caters to meet your real estate business goals. To find the right option, do good research on the same and analyze the accessibility of each option. For this, you may talk to some established investors as well.

Learn about various financing strategies as well as the methods to leverage each one of those strategies before going on with your maiden investment in the field.

Real Estate Financing Choices

If you have already spotted a property and have a potential deal lined up, you have crossed the first hurdle in the business. The next step is to find a financing option so that you can invest in that property. Usually, the inability of zeroing in on the right financing option will be one of the main issues that worry amateur investors in this case. However, giving up on your dream, especially when you have a great deal on the table is stupid. Plus, there is a plethora of financing options out there and some of those prospective options include:

Cash financing – This is an ideal choice for all the investors who have accessibility to an adequate amount of capital. This way, you can purchase a property even without having complete working capital in hand.

Seller financing – by striking up a mutual agreement, the seller and the buyer can avoid arranging the capital from a lending company or other outside sources.

Hard money lenders – this is a good choice for the investors who boast not-so-perfect credit or financial history. Obviously, it will be challenging for such investors to arrange capital from other sources. Usually, people who are in need of short term business loans rely on hard money lenders.

Private money lenders – if you hail from a reputed background and have a good connection with others, you can easily tap into money from these contacts. This, however, involves repaying the capital in a specified time period along with interest. Evidently, this is similar to business loans.

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However, you can see a constant lack of financing in the field that makes things harder for most of the new real estate investors. This is simply because of their lack of knowledge about different financing strategies and options. Note that there are numerous ways to acquire capital in the real estate field whether or not you have access to working capital. This explains why investing in the real estate field is always a good idea. Some of the personal and financial benefits that you may get by financing in real estate include home appreciation, increased cash flow, tax benefits, etc.

In fact, the idea of investing in the real estate field continues to be one of the best business options. According to many studies, approximately 70% of people in the United States who are reported to have more than a million dollars income tax returns in the past 50 years are employed in the real estate field. An ironical fact about this business is that most amateur real estate investors may lose their capital or may face a number of financial hurdles before their business flourish.

If you are planning to invest in the real estate field, it is better to go through the potential real estate financing options as well as the prominent loan schemes that are available.

What Exactly is Real Estate Financing?

Real estate financing can be defined as the method adopted by an investor in the field in order to secure funds for a forthcoming deal. As the name indicates, the investors will have to secure their fund from an outside source in this case to buy or renovate a property. Like traditional financing, real estate financing also comes with several terms and conditions. Note that it is crucial for an investor to understand even the smallest condition thoroughly before closing the deal. In real estate secured funding the property acts as collateral and a lean can be placed on that property.

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There are several reasons why you should consider the services of revenue-based funding companies.

• Longer Repayment Terms: As opposed to several other financing resources, revenue-based funding offers the facility of longer terms for repayment of borrowed money. This makes things more manageable for the borrower, especially if there are financial constraints involved. Consider merchant cash advances, for instance. This facility requires you to pay a set amount every day, and also follows a percentage-based structure, but with daily payments. Therefore, revenue-based financing is easier and more convenient to repay.
• Larger Financing Amounts: In comparison to other forms of funding, revenue-based funding provides huge sums of money. In the case of merchant cash advances, you can acquire $250,000 of money at maximum. However, revenue-based financing functions on longer repayment terms, and hence involves larger sums of money. Lenders in this category even provide up to $2 million to those in need.
• No Equity Dilution: If you decide to choose revenue-based financing over equity financing or VC funding, you would be able to preserve the equity in your company. If you avail VC services, you are effectively handing over control of your company into their hands. Revenue-based companies only demand money back, along with interest, of course.

The Disadvantages

Some of the disadvantages of revenue-based financing are as follows.

• High Repayment Amount: The cost of capital becomes very high in revenue-based financing. It acts as an extended version of merchant financing, with its giant factor rates. You will take longer periods to repay because payments are made monthly. As a result, the amount you have to pay would become much higher than what you actually borrowed.
• Relatively Slow to Fund: Note that revenue-based funding companies offer funding after a long time in comparison to other channels of funding. These firms may reiterate that they offer quick payments, but this can stretch to 30 days. This period is comparatively longer than the usual industry standards. There are several funding companies which are capable of providing financial assistance within a day of application. Bear these factors in mind before you decide to avail services from revenue-based funding companies.
• No Prepayment Incentives: If the repayment period is longer, the lender presents prepayment incentives. Generally, lenders give these to customers in order to encourage them to pay early. However, in the case of revenue-based financing, no such option is available. The option is very much like an extended merchant cash advance, and there are no bonuses for those who pay ahead of time.

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The prospect of giving up control of their business to someone else is scary for many entrepreneurs, and to get around it, they search for non-equity options of financing as a substitute for VC funding. This often leads them to revenue-based financing. Below is a discussion on how that works.

The Details                                                     

There are four major details regarding revenue-based financing which you need to evaluate in order to determine whether it is the right funding option for your business.

• Rates: The costs incurred by revenue-based financing companies are expressed in terms of “repayment caps.” These are very high factor rates and are multiplied with the principal amount in order to obtain the total amount you have to pay the company back. The factor rate is an integer value between 1.35 and 3 and is high for long-term deals. Effectively, many lenders end up charging their clients double the amount which they borrowed in the first place, or more.
• Amounts: Revenue-based financing is a long term funding option. This means that the amount available is usually larger than you find with alternative options. The funding firms which offer this service generally provide funding from $100,000 to $2 million.
• Repayment Terms: Since this form of funding involves percentage-based monthly returns, there are no fixed terms involved in the repayment of the amount. Monthly-based finances are necessarily related to the monthly revenue, and that will fluctuate every month. In this type of funding, 2-8% of your business revenue would be required to pay the firm back, and the process would continue until the amount was paid back in full.
• Requirements: The majority of revenue-based financing firms are ready to work with only a selected type of companies. The best firms work with fast-growing clients. If you come under that category, you can avail this financing option.

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When it comes to a revolving account, there is no set monthly payment, but the credit length would be ongoing. A cardholder can make purchases as long as they do not exceed their spending limit, as well as make minimum payments each month. Sure, interest accrues and it is capitalized just like any other credit. However, the revolving payment option is appealingly flexible for customers.

An example of revolving line of credit is HELOC, which expands to Home Equity Line Of Credit. A pre-approved credit amount is given to the borrower according to the value of their home, which makes this a secure credit type. He or she can access the funds in their account in many ways – via check, transfer, or even a credit card connected to their account. The account holder only has to pay interest on the used money, and the HELOC account gives him or her flexibility to draw on their available line of credit when required.

Line of Credit

A line of credit is effectively a one-off arrangement. When a bank customer has spent the set credit amount, their account is closed. The “non-revolving” credit line has similar features to a revolving one. A lending institution sets a credit limit, the account holder can use funds for many different purposes, normally interest is charged, and he or she can make payments at any time.

There is a major limitation to this arrangement though. After no payment does the pool of credit available to you get bigger. After you pay off the credit line in full, your account is closed, and you cannot use it again.

Personal credit lines, another type of bank loan, are at times offered to customers in the form of overdraft protection plans. The customer of a bank can subscribe to a plan which is linked to their checking account. When he or she goes over the available amount in it, the overdraft keeps him or her safe from check- bouncing and payment denial. As with any credit line, the withdrawn amount has to be paid back with interest.

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Two features make both options particularly attractive to borrowers: the flexibility with regards to purchasing and payment. Depending on the line of credit terms, one can use it as and when required, and pay it off when convenient. To stay safe though, it bears understanding how each works, and this can be done by looking at relevant examples. Both work similar to a credit card scheme, but with a notable difference.

Revolving Credit

This type of credit line is also extremely similar to the typical card scheme. The lender informs the borrower of a credit limit – the maximum amount which they can use to purchase something in any single instance. Typically, this option is used by the average guy to buy the goods he needs.

Now, let us understand how revolving balance works with an example.

An Example of Revolving Payment Balance

If a person named Michael has a card with $10,000 as the credit limit, he can spend $10,000 on services or products. If Michael bought something for 1,000 dollars, he would get a bill for that amount at his billing cycle’s end. The bank offers some different repayment options to him. He can write a $1,000 check and pay before his grace period ends, and avoid paying any finance charges to the card issuer. He can also choose to make either the minimum monthly payment required by his bank, or anything above that. If he chose to pay $400 for instance, he would be carrying the remaining $600 over to the subsequent billing cycle. Interest would apply on that, and he would get a bill inclusive of that extra charge.

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How Do Equipment Loans Work?

A bank or a financial services company issues this type of loan to customers in order to help them fund a portion of their equipment’s purchase cost. Such a loan is taken used by a small business that is looking to retain cash by spreading out such expenses over several months.

What about Collateral?

Put simply, collateral is something which a borrower pledges as security for a loan’s repayment; if they fail to pay back this loan, then their lender of choice will seize the collateral. The same principle works in equipment financing as well, but here the purchased equipment itself acts as the collateral. In other words, a borrower does not have to put up anything else in that stead. Like in any other form of secured funding, here, your lender would take the equipment back in case you fail to repay the equipment loan.

What Can You Buy with an Equipment Loan?

An equipment loan is used to make big purchases of assets that are likely to retain their value over time. These physical assets include the following.

• Large automobiles, such as semi trucks.
• Manufacturing equipment (for example, laser cutting machines, plate rolling machines, band saws, and so on).
• Big commercial printers.
• Farm equipment, such as tractors.
• Healthcare equipment (for instance, diagnostic machines, infusion pumps, X-ray machines, and so forth).
• Large construction vehicles as well as equipment (for example, mixer trucks, skid steers, cranes, etc).
• Computer servers.
• Restaurant equipment, such as ovens and ranges.

Other Facts to Know about Equipment Loans

A loan of this type requires less documentation in relation to several other forms of funding (such as an SBA loan, to name one), and you can usually get funded in under a week’s time. Interest rates on this usually fall between 6% and 9%. A small business owner who has a better credit score, as well as larger down payments, could get relatively lower interest rates. A borrower with a lower credit score as well as less cash to put down would see higher rates.

The usual term of repayment for a “non-SBA” loan of this sort is 1 to 5 years, but that can extend up to 10 years depending on the size of the equipment purchased, as well as its shelf life.

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