The Importance of Financing Your Business
Cash is the lifeline for any business to function properly. Whether you have a start-up company or one that has been in operation for years, cash is needed to operate your business. Without it, employees can’t be hired, inventory and equipment can’t be purchased, and utilities, rent and all other business expenses will not get paid. An entrepreneur’s idea can not be put into action without cash for the business operations. As the business grows, you will need to turn to a lender for financing. Financing for your business has its own advantages and disadvantages for the business both short and long-term goals must be considered during your research of what type of financing you need.
For new or start-up companies, securing financing can be very hard because you don’t have the operating revenue lenders like to see and can be compounded if the stakeholders have poor credit. Having a business plan is also not going to be enough.
Lenders want to see positive cash flow and business or personal assets to secure a loan so they can avoid high risk or a loss if you default due to lack of cash flow coming from your business.
One of the primary advantages of debt financing is that the stakeholders do not give up any ownership/equity in the company or any control in how the company is operated.
The disadvantage is that the lender expects to be repaid with interest. Ownership has to prove the ability to manage the inflow and outflow of cash on a daily basis and repay the loan with interest over time.
Additional Financing Options
There are other ways of financing your business that provide the benefits of both debt and equity financing. Taking on debt from a third party can provide cash with interest-only terms.
Mezzanine financing may be available as a loan option through a bank or third party. It will be at a higher interest rate, but will have the flexibility to convert to equity.
The business owners should review the advantages and disadvantages of each source of financing when considering the short and long-term strategy for the company’s growth as it relates to taking on debt through a business loan for your company.
Too much debt to be serviced can hinder a business’s cash flow at a time it needs to grow and when there is a slowdown in operations.
These decisions should be considered before the need to take out a loan to assure that funds will be available when needed.
Peach Capital Funding is here to provide you with knowledge and insight as to what you should do and when you should take out a loan to finance your startup business or existing business.