Small Business Finance – Finding the Right Mix of Debt and Equity

A small business owner can find financing difficult and time-consuming. Finance can be the most crucial part of growing a company, but it is important to not let the business become too dependent on it. Finance is the interaction between cash, risk, and value. You can manage each one well to ensure a healthy finance mix for you business.

Create a business plan. A loan package should include a well-developed strategic plan. This plan must be linked to realistic and believable financials. You must know exactly what your financial needs are before you can finance a company, a project or expansion.

Your business can be funded from a position where it is strong. You can show your confidence by investing up to 10% of your finances from your personal funds as a business owner. Private investors and venture capital can provide the remaining 20% to 30% of your cash requirements. While sweat equity is to be expected, it cannot replace cash.

The private equity component may require a 30% to 40% equity stake for three to five year depending on the value of your business and the risks involved. This equity position will allow you to leverage the remaining 60% of your financing needs while maintaining clear majority ownership.

You can get the remaining finance in the form short term working capital or long term debt. A variety of lenders are likely to be interested in you if your company has a good cash flow. A commercial loan broker is an expert who will do the “shopping” for your company and give you a range of options. This is a crucial time to ensure that your company gets finance that suits your needs and your structures.

If your company has a healthy cash position, additional debt financing won’t cause any disruption to your cash flow. A healthy level of debt is sixty percent. Unsecured finance is available in short-term, long-term, and line credit financing. Unsecured debt is often called cash flow finance. Creditworthiness is required for this type of financing. Secured or asset-based financing, also known as debt finance, can be used to finance accounts receivables, inventory, equipment and personal assets. Letters of credit can also be provided, along with government guaranteed finance. The advantage of having strong cash is the ability to mix secured and unsecured debt according to your company’s needs.

Cash flow statements are important in monitoring the impact of different types of finance. To plan and monitor the finances of your company, it is important to have a clear understanding of your monthly cash flow and to establish a budget control structure.

Your strategic planning process will also influence your finance plan. It is important to match your cash needs and cash goals. It is not a good idea to use short-term capital for long-term growth, and vice versa. Violation of the matching rule could result in high risks for the interest rate, refinance options and operational independence. It is possible to deviate from this old rule. If you have a long-term need for working capital, a permanent capital requirement may be necessary. A good strategy for financing is to have contingency capital available. This will allow you to meet your working capital requirements and give you maximum flexibility. You can, for example, use a credit line to quickly access an opportunity and then arrange for long-term finance that is cheaper, more suitable, and better suited. This process must be planned upfront with a lender.

Finance is rarely addressed until a company faces financial crisis. With a solid business plan and loan package, you can plan ahead. Equity finance doesn’t stress cash flow like debt and lends confidence to your company. A good financial structure can reduce capital costs and finance risks. To help you plan your finances, consider hiring a financial professional, a loan broker or a business consultant.

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