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

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Financing a small business can be the most time-consuming activity for a business owner. It can be the most crucial part of growing a business, but one must not 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 precisely what your finance needs are.

Small Business Finance

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.

Depending on the valuation of your business 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 in the remaining sixty percent of your finance needs.

The remaining finance can be long-term debt, short-term working capital, equipment, and inventory finance. Having a solid cash position in your company will make various lenders available to you. It is advisable to hire an experienced commercial loan broker to do the 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.

Debt finance can come in the form of unsecured finance, such as short-term debt, line of credit financing, and long-term debt. Sixty percent of the debt is healthy. With a solid cash position in your company, the additional debt financing will not put undue strain on your cash flow.

A customized mix of unsecured and secured debt, designed specifically around your company’s financial needs, is the advantage of having a solid cash position. Unsecured debt is typically called cash flow finance and requires creditworthiness. Debt finance can also come in secured or asset-based finance, including accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government-guaranteed finance.

The cash flow statement is a significant financial in tracking the effects of certain types of finance. It is critical to have a firm handle on your monthly cash flow, andthe control and planning structure of a financial budget tto plan and monitor your company’s finance successfully.

Your finance plan is a result and part of your strategic planning process. It would help to match your cash needs with your goals carefully. 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 old rule is permissible.

For instance, if you have a long-term need for working capital, a permanent ceed 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, 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 finance risks. Consider using a business consultant, finance professional, or loan broker to help you with your finance plan.

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