<>a>p>You are looking for business finance to start or grow a company. Have you determined if your Finance Initiative is feasible? What factors should you consider? I explore the areas of Cost, Risk, Flexibility, Control and Availability to help you determine if your plausible funding sources are a good match for your business finance campaign.
In the capacity as Business Turnaround Specialists who develop business plans for business funding, I often see business owners don’t deliberate these funding factors cautiously. Be sure you do to find the right funding source for your specific capital requirements.
Costs of Funding
How will each Funding Source affect our Company’s Earnings?
Plug in the Interest Rate and Equity Participation Models into your Income & Expense Statement and Cash Flow Statement of your Comprehensive Business Plans to see the effects of Debt and Equity Finance on your short- term and long- term Earnings and Cash Flows. What is the effect on your Marketing Plan and Strategic Plan?
Risk Exposure
What levels of risk exposure are associated with the different Sources of Funding you are considering?
In equity finance, the investor is taking the risk so the equity finance holds less risk to the business than debt finance would present.
- Determine the Risks on your Cash Flows which Debt Capital imposes. How does mixing Debt and Equity Finance affect your Risk Threshold?
- Remember: Debt Finance is conservative but it does present an integral interest rate and default risk. Leveraging your Debt exposure with Equity Funding can be a very effective means of reducing your Total Finance Risk.
Flexibility
Will covenants and conditions imposed by your Potential Funding Sources reduce your Flexibility in obtaining future Capital or leveraging internally generated Capital?
When considering commercial debt finance and business loans, understand they can carry restrictive covenants which will prevent you in the future from pledging certain collateral, inventory or receivables for other finance needs. When you are negotiating your business debt funding, pay particular care to your asset classes and how you package your collateral.
Consider Sale-Leaseback Structures to maximise Loan to Values and Tax Advantages on your Equipment and Machinery. Lease Structures are very flexible and are structured specifically for certain assets.
Consider Cross-Collateralizing your Assets only if absolutely necessary as this Business Finance Practice can take away a lot of the future flexibility for collateralizing loans.
Rolling Credit Lines can be set up using a variety of Collateral Sources and supply instant opportunity Capital when needed.
- You could use rental income from a Real Estate Investment to secure a Line of Credit.
- You can use Blue Chip Stock Portfolios as LOC collateral.
- Think outside the box and reserve your major Asset Classes for your Major Finance needs. For instance:
- Real Estate Assets for Long- Term Finance.
- Equipment and Machinery for Lease Finance.
- Receivables for Factoring when needed.
- Inventory for short term finance needs.
- Cross Collateralize Personal Assets for your Line of Credit Opportunity fund: Rental Property, House, Condo, Stocks, Cash Value Life Insurance, etc.
- Utilize Supplier Credit to leverage your LOC if necessary.
Note: Short- Term Finance is often much more expensive than Long- Term Finance so ensure your anticipated Revenue Growth & Cash Flow can quickly pay it off. Remember the Matching Rule.
Control
Can your ownership control be affected?
- Determine the effect of Board of Directors representation.
- What Operating Mandates does a potential Equity Sharing Agreement contain?
- Will pledging of Shares for Equity or Debt Finance inhibit your control down the road? i.e. May not affect present day operations but could affect Operations down the road as your Stock Structure, Ownership Structure or Business Structure changes over time.
Funds Availability
How has availability to certain Business Funding Sources been affected?
- Economic Conditions can severely limit the availability of Bank Finance. Prolonged Economic Downturns can limit Equity availability.
- Timing is key for Equity Funding. Are the Venture Capital Funds you are interested in still investing in opportunities or have they closed the fund or pledged their remaining funds already?
- What Alternative Funding Sources are in your Funding Strategy if availability for anticipated, preferred Finance Sources dries up?
Analyzing The Funding Factors
Which of the prescribed Business Finance Factors are most important? Prioritize your Factors to be applied to your development of the Company Funding Strategy. Prioritizing will allow you to easily assess how certain Finance Sources can or cannot be used, as well as, enable you to you to begin structuring your Funding Instruments and Products.
About The Writer – Frank Goley
Frank Goley has an experienced background working with small and medium size businesses as a business consultant, business turnaround consultant, business plan writer, business plan expert, small business consultant, business coach, business plan consultant, marketing consultant, business planner and online marketing consultant, and seo consultant for ABC Business Consulting. He has been helping companies to succeed for many years. Frank wrote his first business plan over twenty years ago. He is an expert in developing business plans, marketing plans, funding plans, strategic plans, turnaround plans, web marketing strategies, and project specific business plans. Frank is the author of Business Plan Book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 150 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog and publishes the Business Success Newsletter.
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