Funding Options for Your Growth Plan
Introduction and Overview
If you are really serious about growing your business–unless you are fortunate enough to have cash or liquid assets available to fund your business, you’ll have to embrace funding.
Funding, whether it’s debt or equity, always involves due-diligence, So, the business books need to be water-tight.
They’re going to want to know every single aspect of your business, because they need to confirm the value of your business.
Cash is the fuel for your business. Growth requires more cash.
Debt to equity ratio-Your company’s Gearing.
Before going into detail on the merits of debt funding vs. equity, it is important to be aware that debt lenders and equity investors will take into account what is known as your “Debt to equity ratio” also called “gearing” as it currently stands and what it would be after they provide cash either as a loan (debt) or equity (investment).
There is a section with an explanation of how it is calculated, and an example in the Financial Control Program.
What is Debt financing?
Debt financing is where you borrow money from a lender that will generally have a monthly repayment schedule comprised of both loan repayments and interest. Although interest only for the first few years or with a balloon payment on termination might be possible from some providers.
If you’ve ever taken out a loan from your bank, you’ve financed something with debt.
Pros of debt financing vs. equity
- With a business loan, you’re in control of how that extra capital gets spent. For the most part, what you’re using the loan for is up to you.
- Because the lender does not have a claim to equity in the business.
- A lender is entitled only to repayment of the principal of the loan plus interest and has no direct claim on future profits.
- Debt financing is flexible. There are many different kinds of loans with wide ranges in how much money you’ll get, interest rates & loan duration.
- Debt can be short term, with lines of credit that finance cash-flow swings, or long term, with loans of up to 10 years .
- Interest payments and bank fees on debt are tax-deductible.
- Taking on debt is cheaper than equity in the long run, after taking into account associated costs.
What is Equity financing?
Equity financing is where you trade a level of ownership of your busines, in return for their capital.
Equity is especially important for certain industries and kinds of businesses, such as technology start ups and companies with global aspirations.
Debt lenders are highly unlikely to lend large sums of money to start-up companies with no proven track record and an IPO (Initial Public offering or float) for a new start-up is equally unlikely to succeed.
Pros of Equity vs. Debt financing
- You don’t have to pay interest on the capital you raise,
- With the right investors, you can also get great experience, industry connections & much more.
- The investors assume nearly all the risk.
How do you know which is right for you?
If you’re having trouble deciding between debt and equity financing, here are five questions to ask yourself:
- How soon do you need financing?
If you need cash as soon as possible, then debt financing is your best option
2. How much capital do you need?
If you’re only looking for a small amount, debt financing is the better choice.
3. Are you looking for more than just money?
If so, equity is probably for you. You will get access to an investor’s knowledge, expertise, & contacts.
- Do you mind sharing your business?
Many entrepreneurs prefer to keep control of their businesses , in that case equity financing isn’t the way to go.
- How big do you want to get?
Investors and venture capital companies often look for companies with the potential to grow into national brands or global businesses. If that’s your goal, then equity can help you get there.
In Conclusion
If you believe that the “Funding Options for Your Growth Program” might be right for you, you can book a free 15 minute call with me personally, so we can explore whether it is a good fit for you and your business at this time.
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