Small Business Finance - Choosing the best Mix of Debt and Equity
Financing a small business can be most time consuming task for a company owner. It can be the most significant part of growing a company, but one must be careful to not allow it to consume the business. Finance is the association between cash, risk and value. Manage each well and you'll have healthy finance combination for your business.
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Produce a business plan and loan package that has a well developed strategic plan, which then relates to realistic and believable financials. Before you can fund a business, a job, an expansion or an acquisition, then you need to develop precisely what your finance needs are.
Finance your company from a position of strength. As a business owner you show your confidence in the business by investing up to ten percent of your finance needs from your own coffers. The remaining twenty to thirty percent of your money needs can come from private investors or venture capital. Remember, sweat equity is expected, but it's not a replacement for money.
Depending upon the evaluation of your business and the risk involved, the private equity element will want on average a thirty to forty percent equity stake in your organization for three to five years. Giving this up equity position in your company, yet maintaining clear majority ownership, will provide you leverage at the remaining portion of your finance needs.
The remaining finance can come in the shape of long term debt, short term working capital, equipment fund and inventory fund. By having a strong cash position in your company, an assortment of lenders will be available to you. It is advisable to employ an experienced business loan agent to do the finance "shopping" for you and present you with a variety of options. It's important at this juncture that you get finance that satisfies your business needs and structures, instead of trying to force your construction to a financial instrument not ideally suited to your operations.
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Possessing a solid cash position in your business, the additional debt financing won't place an undue strain on your cash flow. Sixty percent debt is a healthful. Debt finance can come in the shape of unsecured fund, for example short-term debt, line of credit financing and long term debt. Unsecured debt is typically referred to as cash flow fund and requires credit worthiness. Debt fund can also come in the form of bonded or asset based fund, which can consist of accounts receivable, inventory, equipment, property, private assets, letter of credit, and government guaranteed finance. A customized mix of unsecured and secured debt, designed specifically around your company's fiscal requirements, is the advantage of having a strong cash position.
The cash flow statement is an important financial in monitoring the effects of particular kinds of finance. It is critical to have a firm handle on your monthly cash flow, together with the control and planning arrangement of a financial budget, to successfully plan and track your company's finance.
Your fund plan is an outcome and part of your strategic planning process. You need to be careful in matching your cash needs with your cash objectives. Using short term capital for long-term growth and vice versa is a no-no. Violating the matching rule can cause large risk levels in the interest rate, re-finance possibilities and operational independence. Some deviation from this age old rule is permissible. As an example, for those who have a long term requirement for working capital, then a permanent funding need could be warranted. Another fantastic finance approach is having contingency funds available for freeing up your working capital needs and providing maximum efficacy. For instance, you can use a line of credit to enter a chance that quickly arises and then organize for more affordable, better suited, long term fund then, planning all of this upfront with a creditor.
Unfortunately finance isn't typically addressed until a company is in crisis. Plan ahead with an effective business plan and loan package. Equity finance doesn't worry cash flow as debt may and provides lenders confidence to do business with your company. Great financial structuring reduces the costs of capital as well as the fund risks. Consider using a business adviser, finance loan or professional agent that will assist you with your finance program.
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