The Facts of Financing

Your mother always warned, “Don’t put all your eggs in one basket” and those words of wisdom can be applied when financing a business. There are a number of methods that can aid buyers in financing a business. Buyers must recognize their available resources such as the seller, lenders, and investors.

As a child, we’re encouraged to “dream big” and told that nothing can stop us, but ourselves. As entrepreneurial adults, this idea of dreaming big is often a part of your everyday routine, but it is inevitable that at some point you’ll come crashing down from those heights into reality. The realization that financing your particular endeavor can instantly dampen even the most impassioned enterprising individual can get you down. To put it bluntly, “Don’t let it”.

Having a reality check on the difficulty of securing financing for a business can be the first step towards making your dream an actuality. There are numerous types of financing available, some more unorthodox or obscure. If you take the time and effort to research all avenues for funding you will be rewarded.

There are two main types of financing: debt financing and equity financing. It is important to you and the success of your business that you familiarize yourself with the types of financing in order to choose, seek, and finally, obtain the right form for your needs.

Debt financing involves borrowing money that will be repaid over a certain allotted time with a set interest rate tacked on. The time of such financing can be short term or long-term. In most cases, short term financing would include repayment within one year, while long-term financing would entail repayment in a time period that exceeds one year.

An advantage of this type of financing is the fact that the lender will not gain ownership in your business. You remain in control and your only obligation to them is to make regular and timely payments. In the case of small startups, a personal guarantee is often needed to facilitate the closing of the financing deal.

Equity financing, unlike debt financing, will involve giving the financing entity a share in the business. Some business owners dislike the idea of losing any amount of control. On a positive note, this type of financing does not incur debt. This kind of freedom from debt can give a greater sense of security in starting a new business. In addition, some entrepreneurs find great value in their equity financing partners, and see their presence as an asset.

The type of financing you will choose is based largely on the needs of your business and the kind of collateral, or available assets you have to offer. A substantial amount of debt financing can lead to poor credit and a shortage of funds in the future due to an inability to apply for more financing. A business that becomes overextended, offers little collateral, and is steeped in debt is not an appealing option for many investors.

As previously mentioned, there are other more unorthodox methods of obtaining funds that can certainly prove to be beneficial to your business. Some options can be found in your own circle of friends and family. One benefit of this type of financing is obtaining the money and a silent partner who will most likely not interfere with your business. It can also eliminate some of the red tape involved with more traditional forms of financing. This does not mean you can simply use a verbal agreement or “shake on it” to signify and bind the transaction. This is still a strategic business move and you must treat it as such which means proper documentation, clear terms, and mutual understanding of those terms.

Relationships can be ruined over inept efforts with this type of financing, so value your business and the other person by treating it with professionalism, attention to detail, and respect. Don’t become the black sheep at the next family reunion over some misunderstanding or your falling behind on payments.

A few other options that are largely unknown to those who haven’t done research include unsecured loans and micro-loans. Resources such as TheSnapLoan.com or Prosper.com offer loans based on cash flow, credit score, and debt-to-income ratio. Government grants are also a largely untapped resource that is made available to entrepreneurs. Simply researching the website Grants.gov can be extremely helpful in your search for funds.

Venture capital is another route that many entrepreneurs look to due to the amount of funding that can be procured. A venture capitalist will likely offer larger sums of money that can be of great assistance to your business, but they will also gain a certain portion of control and ownership. This type of funding however is usually scarce due to the assumption that many startups will inevitably fail. You will need to find someone willing to take the risk and who sees potential in your vision.

This type of person could also be found in a more palatable option known as the Angel investor. The Angel investor typically has a high net worth and like the venture capitalist, must believe in the product and the person behind the product. Their loan often converts to stock, preferred stock, or convertible bonds.

Working Capital Business Financing Sources

Working Capital business financing is never a question of why – it’s just simply a matter of when! Working capital and cash flow are of course the heart of every business. The challenges of obtaining that financing become a question of time.

Perhaps you need cash for for your regular ongoing business cycle – that’s the simple one – you buy inventory, your produce things, you sell, bill and collect. In a perfect world your suppliers give you unlimited time to pay, and unlimited credit limits. And of course your customers pay you in exactly 30 days. Guess what? It’s not a perfect world!

If you are a traditionally financed firm you have access to bank capital for revolving credit lines based on your business needs. But for a growing number of Canadian firms that access to traditional bank capital is not available. Those scenarios require a special expertise in identifying sources of business financing that work for you. The solutions actually are quite numerous – its becomes a questions of which solution works for your firm, what are the costs involved, and does the solution fit within your business model.

The business financing we are talking about can take many different forms – it might include an asset based line of credit, inventory financing or purchase order financing, a sale leaseback on unencumbered assets,, working capital term loans, or accounts receivable financing, otherwise known as factoring.

One of the most important things you can do for business financing is to ensure that the type of financing you source matches your needs. What we mean by that is that you should match short term needs with short term financing. Factoring might be a good example. If your receivables aren’t financed, and you need cash to meet inventory and supplier commitments that type of financing is immediate and addresses your needs. Why would you enter into a five year term loan at fixed payments for a short term capital need or requirement?

The best way to think of short term financing is to focus on the current assets part of your balance sheet – those items include inventory and accounts receivable typically. Those assets can quickly be monetized into a working capital facility that comes in a variety methods. The reality is that your inventory and accounts receivable grow lock step to your sales and your ability to finance them on an ongoing basis will give you access to, in essence, unlimited working capital.

There are some solid technical rules of them around how you can generate positive pricing for operating facilities. By calculating and analyzing some basic financial ratios (we call them relationships) in your financial statements you can get a strong sense of whats available in working capital business financing and what pricing might be involved. Those ratios are your current ratio, your inventory turns, your receivables turns or days sales outstanding, a, and your overall debt to worth ratio. Depending on where those final ratio calculations come in will ultimately allow your working capital financier to put your firm in a low risk, medium risk, or high risk band of pricing?

In Canada working capital rates range from 8-9% per annum to 1-2% per month, depending on what assets are financed and how they are financed.

So whats our bottom line in working capital business financing? It is simply there are alternatives available and you as a business owner of financial manager can assess those alternatives in terms of short term needs or long term needs. Pricing and solutions vary, and your ability to convey the positive aspects of your business to the working capital lender will ultimately lead to a final pricing and solution. Speak to a credible, experienced and trusted working capital business financing advisor to determine what solutions are the best for your firm.

Benefits of Financing Your Business Equipment

The advantages of financing are greater than ever. Any business or organization can benefit from these advantages which include reduced costs, simplified budgeting, credit preservation and flexibility. When it is time for your business to make a financing decision, equipment financing allows you to take full advantage of business opportunities while enjoying critical flexibility and investment protection.

More for Your Money

Many businesses struggle with the need to grow while feeling constrained by a lack of capital. What so many business owners don’t know is that equipment financing can increase your buying power and decrease your expenses. When you finance rather than use working capital, you can afford a more complete solution while making lower monthly payments and paying little or no up-front costs. This leaves your working capital intact while allowing for the needed growth.

The larger the business acquisition, the greater the benefits of financing. For large-scale projects financing can mean the difference between making those changes now and putting them off indefinitely. Putting off necessary changes often means taking your business out of a competitive market position – a position that can be difficult to regain.

Critical Business Advantage

As the business landscape changes on a daily basis, it can be imperative for your own business to adapt and grow to match the market. This is especially true for software and services that are vital but can have large up-front costs. Unfortunately, there are many companies that lack – or think that they lack – the resources required to purchase all of the equipment needed to keep their businesses productive.

Financing can expedite this business transformation by letting you add necessary service capacity, reduce the risk of your technology becoming obsolete and can decrease the total cost of ownership. Equipment financing can provide flexible payment options tailored to your specific budget requirements or timed to match your benefit streams, enabling your company to afford all of the components necessary to maintain a competitive business edge.

Speeding Up Your Business

Other obstacles to keeping businesses moving ahead at an effective pace can include budget constraints and the lack of capital. But emerging markets and those ever present competitors won’t wait for you to catch up. Financing those business purchases means that a lack of capital doesn’t have to cripple your business endeavors.

Equipment financing enables companies to quickly adapt to changing competitive environments, and any business strategy should include access to flexible and competitive financing options. Take some time to research equipment financing companies. The good financing programs offer customers competitive, flexible financing solutions for acquiring hardware, software and any other equipment that your business might need.

Competitive Advantage

It is a simple fact that business solutions are becoming obsolete faster than ever. A customer-focused equipment financing program provides flexible, cost-effective solutions that can help you acquire the technological components that you need to migrate to new business models and to maintain your competitive edge including software applications. This benefit can help ensure that your business never faces the specter of business obsolescence.

You should consider taking advantage of the flexibility that financing offers if your business is in the market for new equipment. This flexibility can help you stay ahead of the technology curve, and ahead of the competition.

A Hedge Against Inflation

With an economy that may seem less than stable, it is important that businesses, especially newer businesses, take advantage of every opportunity that gives them protection against tough economic times. Postponing growth is not necessarily the best way to protect your business as it can result in a loss of customers if you can’t offer them the services that they need or want.

When growth becomes a necessity, equipment financing can allow you to grow the way that you need without making your financial base less stable. The right equipment financing program not only gives you the access to capital that you need for growth but it could also lock in the rates for the loan. This means that you won’t have to worry about your rates falling victim to inflation… ever!

Don’t Fear Financing

The business world can be cutthroat. That’s no secret. So in the quest to keep your own business competitive or to grab a bigger share of the market, don’t let the lack of capital inhibit your plans. It would be nice if we could all expand using only the capital at hand, but that is simply not realistic. Equipment financing can be a very valuable tool and one that offers many benefits. It should not be feared. There are plenty of financing programs available that offer flexible and tailored terms to fit your needs. Do your homework and you will find a lender that will work with you rather than against you. In the long run, that financing could be the most valuable weapon in your business arsenal.