Financing a business can be a very complex matter. Even extremely successful businesses often need to take out loans, or explore other business financing options, to continue operating for growth. Luckily, we have plenty of experience in this realm. We have worked with countless business owners to figure out the best loans and capital advice for their companies.
Even the most experienced business owners often need assistance figuring out the best way to finance their business. Not only are there many different options and schools of thought, but loans and other sources of capital can often be quite complex, and potentially detrimental.
Today we’ll talk about what your business can do this year for optimal money management, including seeking financial advice.
Loans and Capital Advice for Businesses: The Basics
Let’s start with the basics: if you are looking to finance your small business, what are the main tools you have at your disposal?
We will discuss these in greater detail, but the most common business funding models include debt and equity financing.
Debt financing simply refers to the loan that you get from a lending institution — usually a bank — and the accompanying payment terms, including interest. To receive this debt capital, the bank will either check your personal credit ratings, business credit history, or maybe even both.
Usually, if your business is in its early stages the bank will want to see your personal credit card history. But if yours is a more established one, your business credit history will be more indicative.
Generally, banks do check your business credit history. But they are also interested in examining other indicators of your business’ financial health and your ability to pay back the loan, like your books and cash flows.
To this end, if you are considering applying for such a loan, it is important to ensure that your business financial records are all in order before going in.
Advantages and disadvantages
Debt financing has upsides and downsides. One of the major advantages is that, although you owe the lending institution money, you remain completely autonomous in how you spend the money and run your company. This also means that once the money is paid back, your relationship with the lending institution is over.
Bank loans can also be a desirable form of business debt to take on because they are quite predictable. You know exactly how much money you owe the bank each month and thus can control for that in your cash flow forecast and budget.
On the other hand, owing money to the bank each month can turn into quite a liability if your business falls under hard times. In the short term it may seem quite doable. But sometimes in the case of long-term loans, the monthly payments can become an issue, especially in the case of unprecedented changes to your business’ finances.
Along these lines, debt financing can be very hard to come by in tough economic times. During economic downturns, bank loans are generally extremely competitive, and many businesses do not end up being granted loans unless they are overqualified.
Equity financing is another fairly common, and highly desirable, form of business capital. It involves receiving money from investors — venture capital is probably the most well-known form of this.
Venture capital is often associated with start-up businesses. The form of investment financing that is most tied to start-up businesses is angel investing. We will discuss start-up business loans later in this post, and in much more detail in our next article.
Now, many small businesses that seek out venture capital funding are commonly in their earlier stages. But there is an important delineation between businesses that might be interested in equity versus debt financing. As it turns out, businesses seeking equity financing often rely on less steady revenue streams.
Equity financing does not actually include a loan. The institution giving out money is usually a venture capital firm, and they simply lose their investment if, say, your business ends up in bankruptcy. This is the main reason that equity financing and venture capital is more appealing to businesses in their earlier stages or without an extremely consistent cash flow.
Venture capital firms also do not charge any monthly payment, so your business does not have to factor that into their monthly balance sheets. And similarly, there is no interest rate connected to a loan to worry about.
Venture capitalists also tend to be much more understanding of the world of business than lending institutions such as banks. As such, a bank loan is usually quite black and white in terms of stringency. However, if you have received equity financing, generally you can count on a fair amount of leeway in how long it takes your business to capitalize on the funding you’ve received.
This may all seem a little bit too good to be true- and there is a catch. Equity financing is not something to enter into lightly. This is why it is so important to have an expert financial advisor on your side when considering going the venture capital route.
The largest, and central, potential drawback to equity financing is that, unlike with a small business loan from a bank, you do sacrifice some of your autonomy as the business owner. When you sign a deal with a venture capital firm, you are essentially taking on a new business partner.
And in some cases, this new business partner ends up having even more say than you do. The larger the investment, the more say in your business the equity firm will have. This can mean giving up often about half of the stake in your company, which also means half of your company’s profits. And if you give up over 50% of your company, you now have a new boss.
Start-up Business Loans
Financing your start-up business is another topic in and of itself (which is why we will devote another post to it). But for now, we’ll review some key things to keep in mind when thinking about finding capital for your startup small business.
Finding start-up capital is, of course, almost always an issue. Even if you are a high net worth individual trying to open your business, starting a new business always comes with unforeseen costs. These which usually end up being much higher than anticipated.
Below we will list a few ideas to get you thinking about how you might want to finance your startup.
Making a plan
First, and perhaps most obviously, you have to have a plan. Many small businesses never make it because the owners did not have a well-thought-out business plan. And you don’t just need a business plan, you need a financial plan.
Devise a plan for how you’re going to finance your business. And know that your plan will almost certainly involve taking on some type and degree of debt.
Are you going to:
- have to open more lines of credit?
- get a cash advance?
- consider angel investing?
- talk to your bank about debt financing?
Whatever it is, it will do you a lot of good to have a strategy going in.
Another very important rule of thumb to bear in mind is not to rush yourself. And this is especially true if you are taking on a significant amount of debt starting up your business. It can be tempting to try and scale as fast as possible to get yourself back in the black, but it is rarely wise or effective.
We admit, it may not be the most exciting way to go about starting your business. However, building it slowly and steadily will almost always pay dividends in the long run.
And finally, you don’t have to do this alone. We help businesses like yours each year with loans and capital advice. And we know how to cater our financial guidance to your specific scenario, whatever it may be.
We Can Help with Business Loans and Capital Advice
These tips for loans and capital management will help you get your business on track to financial success. However, maintaining financial health is an ongoing process. It’s something that requires constant attention and adjustment.
Business financial management can be a full-time job. Business owners tend to be the type of person that likes to “do it all,” and money management can take up a lot of time and energy. Fortunately, whether it’s purchasing accounting software or seeking professional help, there are steps you can take to make the process more manageable.
Get in touch with us here to find out how we can help your specific business financial needs.