Everything You Need to Understand Before Financing a Business Project
For any business owner, financing a small firm can be the most time-consuming activity. It is considered an essential part of developing and growing a business, but it should not consume the business. To have a healthy finance mix of risk, cash and value, it is necessary that you know the art of managing each of them properly.
Business plan and loan package
First of all, make sure that you have prepared a strong business plan and loan package that has a well-developed strategic plan. This, in turn, should relate to realistic financials. You need to be precise with your financial requirements before financing a project, business, acquisition, or expansion.
Make sure you finance a business only from a strong position. Reflect confidence and believe in the firm by investing a part of your finance needs, i.e. 10 percent from your coffers. Now the remaining 20 to 30 percent cash requirements should be arranged from venture capital or private investors. Always keep in mind that we all expect sweat equity, but it should not replace cash.
How to manage finances
Depending on the risk and valuation of your business, the private equity element will be an average value of say 30 to 40 percent equity stake in your business, for around 3 to 5 years. But, giving up the position of this equity in your firm, yet at the same time maintaining the majority of the ownership, will directly give you leverage in the remaining 60 percent of your finance requirements.
The rest of the finance can come along as long-term debt, equipment finance, short-term working capital and inventory finance. If you have a strong position of cash in your firm, some lenders will remain available to your offer. In fact, it is advisable to hire the service of an experienced and professional commercial loan broker who can take care of the finance “shopping” on behalf of you and help with a myriad range of options. At this juncture, it is quite essential to opt for a financial structure that fits the requirements of your business.
Importance of having a firm cash position
Having a firm cash position in the firm means extra debt financing. This will not lead to undue strain on the cash flow. Around 60 percent of debt can be considered healthy, but more than that is a burden. Debt finance comes as unsecured finance, like a line of credit financing, short-term debt, long-term debt, etc. Unsecured debt is termed as cash flow finance and requires creditworthiness. Again, debt finance can be asset-based or secured finance that can include inventory, accounts receivable, real estate, equipment, credit letter, personal assets and government guaranteed finance. A mix of both secured and unsecured debt is designed around your firm’s financial requirements. This can be customized specifically only when you have a strong cash position.
Why is a cash flow statement essential?
The cash flow statement is said to be an important financial element that helps in tracking effects of various kinds of finance. It is quite important that you hire a firm to check on your regular or monthly cash flow, accompanied with a strong planning structure and control of the budget. This will help your company work successfully.
Always remember that your financial plan is a result as well as a part of the strategic process of planning. You need to be extra careful while matching the cash requirements with your cash goals. If you prefer using short-term capital for long-term growth or even vice versa, then it’s a big no-no. If you violate the rules of matching, then it can bring a huge risk in the rate of interest, operational independence, and re-finance possibilities. Again, some deviation from the hard and strict rules of the old age is permissible. For example, if you need any long term working capital, then permanent capital requirement can be warranted.
Why contingency capital in hand is required
Having contingency capital in hand is also considered a well-planned finance strategy. This is necessary to free up the working capital requirements and providing maximum possible flexibility. For instance, you can use a line of credit to reach an opportunity, which arises quickly, and then simply arrange for better and cheaper long-term finance.
Avoid a business crisis with proper planning
Finance is typically not addressed unless a company gets into a crisis. To avoid a financial crisis in the future, plan everything beforehand. You need to decide on the loan package as an effective business plan. Equity finance never stresses on the cash flow and provides lenders the confidence to deal with your business firm. Again, a sound financial structure can reduce the capital cost as well as the financial risks. You can consider taking the services of a business consultant, loan broker, or finance professional.