Small Business Finance - Finding the Right Mix of Debt and Equity

Financing a small business can be time consuming task for a company owner. It may be the most crucial part of developing a company, but one has to be careful not to let it consume the company. Finance is the connection between money, value and risk. Manage each well and you'll have healthy finance combination for your company.

Produce a business plan and loan package which has a well developed strategic plan, which then relates to equitable and realistic financials. Before you are able to fund a business, a job, an expansion or an acquisition, you need to develop exactly what your finance needs are.

Finance your company from a position of strength. As a company owner you show your confidence in the company by investing up to ten percent of your finance needs from your own coffers. The remaining twenty to thirty percent of your money needs can come from private investors or venture capital. Bear in mind, sweat equity is anticipated, but it isn't a replacement for money.

Based upon the valuation of your organization and the risk involved, the private equity element will need on average a thirty to forty percent equity stake in your company for three to five decades. Giving up this equity position in your business, yet maintaining clear majority ownership, will provide you leverage in the remaining portion of your finance requirements.

The remaining finance can come in the shape of long term debt, short term working capital, equipment finance and stock fund. By having a solid cash position in your business, an assortment of lenders will be accessible to you. It's advisable to employ an experienced commercial loan agent to perform the fund "shopping" for you and provide you with an assortment of options. It's important at this juncture that you get financing that meets your business needs and structures, rather than attempting to force your structure to a financial instrument not necessarily suited to your own operations.

Having a solid cash position in your business, the additional debt funding will not place an undue strain on your cash flow. Sixty percent debt is a healthful. Debt fund can come in the form of unsecured fund, such as short-term debt, credit financing and long term debt. Unsecured debt is typically referred to as cash flow fund and requires credit value. Debt finance may also come in the shape of bonded or asset based finance, which may consist of accounts receivable, inventory, equipment, real estate, personal assets, letter of credit, and government guaranteed fund. A customized mix of secured and unsecured debt, designed specifically around your business's financial needs, is the benefit of having a solid cash position.

The cash flow statement is an important fiscal in monitoring the effects of particular types of finance. It's crucial to have a firm handle on your monthly cash flow, together with the management and planning arrangement of a budget, to successfully plan and track your company's finance.

Your finance program is an outcome and part of your strategic planning procedure. You will need to be careful in matching your money needs with your cash objectives. Using short term funding for long term growth and vice versa is a no-no. Violating the matching rule can cause large risk levels in the rate of interest, re-finance chances and operational independence. Some deviation from this age old principle is permissible. As an example, for those who have a long term requirement for working capital, then a permanent capital need might be warranted. Another fantastic finance strategy is having contingency funds available for freeing up your working capital needs and providing maximum flexibility. As an instance, you can use a line of credit to enter a chance that quickly arises and then arrange for cheaper, better satisfied, long term finance then, planning all of this upfront with a creditor.

Unfortunately finance isn't typically addressed until a business is in crisis. Plan ahead with a successful business plan and loan package. Equity finance doesn't worry cash flow as debt may and provides lenders confidence to work with your business. Good financial structuring lowers the costs of capital as well as the fund risks. Consider using a business adviser, fund professional or loan agent to assist you with your finance program.