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Financing lease

Accountants use the term "financing" (or "capital") lease to refer to leases whose objective is to provide financing to the lessee for the eventual purchase of the leased property or to permit the lessee to use the property for most of its useful life. The significance of this characterization is that the property subject to a financing lease must be reported as an asset, and the corresponding rent obligation reported as a liability, on the lessee's balance sheet. A lease that is not a financing lease is considered an "operating" lease for accounting purposes. Assets subject to operating leases are not reflected on the lessee's balance sheet.

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Financing leases

Financing leases are characterized by terms, such as a nominal purchase price option, that effectively commit the lessee to purchase the property at the end of the lease term. For sales tax purposes, every state considers a lessee under a financing lease to have purchased the leased property at the inception of the lease.

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Quick Pick Chart for Financing Sources

Our "quick pick" chart of suggested financing options is loosely arranged according to the general age of a business and whether the financing is for long-term or short-term needs. Just find your profile in the chart, and click on one of the options to read more about it. However, keep in mind that our arrangement of financing options merely reflects how each option is often used, not how the option is always used. Most of these types of financing may be used, under certain circumstances and in certain businesses, throughout the life cycle of a business.

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Financing the Business Sale

Early on in the negotiation process, you'll need to determine where the buyer is going to get the money to purchase your business.

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Short-term debt financing

Short-term debt is a loan for which the scheduled repayment and the anticipated use for the money is expected to be a year or less. Working capital lines of credit and short maturity commercial loans are considered short term debt financing.

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Asset-Based Financing

To generate working capital or to meet specific short-term cash needs, small businesses may use certain short-term assets as collateral for commercial loans. The most common types of asset-based financing are the following:

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Maturity of the Business

Where your business is in its financial life cycle — from startup to aging — will often dictate the availability of certain financing alternatives.

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Debt Financing

Debt financing refers to what we normally think of as a loan. A creditor agrees to lend money to a debtor in exchange for repayment, with accumulated interest, at some future date. The creditor does not obtain any ownership claim in the debtor's business. Debt financing is attractive because you do not have to sacrifice any ownership interests in your business, interest on the loan is deductible, and the financing cost is a relatively fixed expense.

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Payment Terms: Seller Financing

One important question that a buyer is likely to have is, are you willing to finance at least part of the deal? This is a very fair question — during periods of tight bank credit like we've been experiencing since 2008, seller financing is common in many, many business sales. Even as the credit crunch eases, sellers are likely to provide at least some of the financing in a majority of business sales.

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Financing Basics: Debt vs. Equity

A brief overview of the basic types of financing may be helpful to understanding which options might be most attractive and realistically available to your particular business. Typically, financing is categorized into two fundamental types: debt financing and equity financing.

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