Many businesses are experiencing substantial growth that is stressing equipment, inventory, and cash. Fortunately, there are several types of financing available to privately owned businesses. Successful management of rapid growth requires a plan and daily capital management.
How Do You Determine the Best Type of Financing?
The type of financing you use is determined by how you will use the funds. If you are buying equipment, there are three options: cash, lease, or equipment line with a lender. The key is to determine the best type of lender for your needs and to match the term of the financing with the useful life of the asset you are buying.
For example, real estate has a long life and therefore usually is financed through a long-term mortgage. Your need for daily operating cash requires flexible financing, which is usually supported by a line of credit. You can draw on it or pay it back at any time.
Should You Lease or Buy?
You should base this decision on the useful life of the asset, your cash availability, and the type of asset. Most companies lease trucks to conserve cash and assume that the truck will be mostly used up during the life of the lease. For specialized equipment, it may be hard to find a lessor. In this case, a bank equipment line would be your best source. In the end, base your decision on how long you foresee using the equipment, with a shorter period favoring leasing and longer periods favoring buying.
How Do You Raise New Capital When Debt Won’t Work?
If you aren’t in a good position to take on debt, you may need investors, which is more difficult than other types of financing. If your company is new or is not profitable, debt financing is hard to find and expensive when you do find it. Finding investors, family friends, or anyone who believes in you may be your best alternative. Without assets on a balance sheet, finding financing from any source is challenging. In this situation, you need to reach out through your entire network to find sources of investment funds. Unless you have a truly compelling story, with prospects of a quick ramp-up, venture capital is not likely. Focus on individuals. Be prepared to show them what is in it for them when they invest.
How Do You Decide?
Look at your assets and determine if you have borrowing power. If you show tangible net worth and are profitable, then you have options. Focus the borrowing term on the useful life of the equipment or on your cash flow to determine how large of a credit line you need. Start discussions with a banker and also look for alternate financing sources on the internet. Lenders of all kinds will pop up, so check out a few of their websites. Begin with information on how each lender structures financing. You want the most flexibility in terms to allow you to manage your risk, such as early termination penalties. If it turns out that you have reasons to end the financing, you need to avoid costly penalties. This is more important than the interest rate, and your decisions should yield flexible financing at reasonable interest cost and with a lender that you trust.
C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We frequently analyze and advise on financing business growth. Give us a call and we can offer more information and details. Reach out soon before the year gets away and interest rates start an upward creep.