It doesn’t matter if you are a new business just getting started or if you are long-standing established business, all businesses need financing. At some point all business owners debate the most cost effective way to obtain funds to keep the business running smoothly, cover any shortfalls and meet capital needs. The funds are generally used to purchase inventory. equipment, and office or warehouse space.
Two options for financing your business is; equity and debt. Equity financing for your small business is often in the form of investors. An investor might be a family member, a friend, or a business associate. As a business owner the loss of control is the biggest drawback to equity financing. For instance, if Dad gives up a large portion for his savings to invest in your new business, he may want a substantial say in the daily operation of the business, even if he doesn’t know the industry. On the plus side, equity contributions may be easier to get then a bank loan or some other form of financing.
A business may struggle to obtain debt financing without an established track record. When a bank extends a loan they are risking the institutions funds on your business. Generally, the terms of the loan compensate for the risk with an interest rate that reflects your credit worthiness. The more the lender thinks your business may struggle with the payments the higher the interest rate on the loan.
Signing a loan agreement carries a risk for a business owner too. This is why it’s important to proceed slowly when taking on a loan. Take the time to develop a business plan, you cash flow projections, and a realistic estimate of your business needs. Are there alternate forms of financing available? It’s important to remember that failure to make loan payments in a timely manner may have an adverse effect on the ability of to obtain future financing for your business.
A business should generally use debt financing for capital items such as equipment, computers, new buildings, and fixtures that will be used for several years. Especially when interest rates are low, incurring debt for these items, a business can release operating cash flow for the day-to-day operations or new business opportunities. A business might want to consider establishing a line of credit for short term needs.
Debt should be viewed as one of many tools to help your business thrive. No matter what form of financing you choose for your business, to survive you must produce a product or a service that others want to buy.
Are you starting a new business? This can be a complicated process. If you need assistance contact our office at (260) 497-9761 to schedule an appointment with our Advisors.