Financing a small business can be the most time-consuming activity for a business owner. It can be the most important part of growing a business, but one must be careful not to allow it to consume the industry. Finance is the relationship between cash, risk, and value. Manage each well, and you will have a healthy finance mix for your business.
Develop a business plan and loan package with a well-developed strategic plan related to realistic and believable financials. Before you can finance a business, a project, an expansion, or an acquisition, you must develop your financial needs precisely.
Finance your business from a position of strength. As a business owner, you show confidence by investing up to ten percent of your financial needs from your coffers. The remaining twenty to thirty percent of your cash needs can come from private investors or venture capital. Remember, sweat equity is expected, but it is not a replacement for cash.
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Depending on your business’s valuation and the risk involved, the private equity component will want, on average, a thirty to forty percent equity stake in your company for three to five years. Giving up this equity position in your company yet maintaining clear majority ownership will give you leverage over sixty percent of your finance needs.
The remaining finance can be long-term debt, short-term working capital, equipment, and inventory finance. Having a strong cash position in your company will make various lenders available to you. It is advisable to hire an experienced commercial loan broker to finance “shopping” for you and present you with multiple options. At this juncture, you must obtain finance that fits your business needs and structures instead of trying to force your system into a financial instrument not ideally suited for your operations.
Having a strong cash position in your company, the additional debt financing will not strain your cash flow. Sixty percent of the debt is healthy. Debt finance can come in unsecured finance, such as short-term debt, line of credit financing, and long-term debt. Unsecured debt is typically called cash flow finance and requires creditworthiness. Debt finance can also come in the form of secured or asset-based finance, including accounts receivable, inventory, equipment, real estate, personal assets, letters of credit, and government-guaranteed finance. A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is advantageous for having a strong cash position.
The cash flow statement is an important factor in tracking the effects of certain types of finance. It is critical to have a firm handle on your monthly cash flow and the control and planning structure of a financial budget to plan and monitor your company’s finances successfully.
Your finance plan is a result and part of your strategic planning process. It would help to carefully match your cash needs with your goals. Using short-term capital for long-term growth and vice versa is a no-no. Violating the matching rule can bring about high-risk levels in the interest rate, re-finance possibilities, and operational independence. Some deviation from this age-old rule is permissible. For instance, if you have a long-term need for working capital, a permanent need may be warranted. Another good finance strategy has contingency capital to free up your working capital needs and provide maximum flexibility. For example, you can use a line of credit to get into an opportunity that quickly arises and then arrange for cheaper, better-suited, long-term finance subsequently, planning all of this upfront with a lender.
Unfortunately, finance is not typically addressed until a company is in crisis—plan with an effective business plan and loan package. Equity finance does not stress cash flow as debt can and gives lenders confidence to do business with your company. Good financial structuring reduces the costs of capital and the finance risks. Consider using a business consultant, finance professional, or loan broker to help you with your finance plan.
