Debt Financing . What Factors Determine The Type Of Business Funding

Debt financing. When it comes to business funding that is non equity in nature the business owner and manager can benefit from a number of business financing solutions. A good solid way to begin is to identify which solutions are available and to ensure you understand the pros and cons of each.

When it comes to debt finance solutions it’s paramount to remember that the lender, finance firm, bank etc is not sharing profits and is at risk – as such pretty well their only focus is getting paid!

In a way that’s the benefit, i.e. one of our pros of taking on debt – You know exactly what conditions and rates come with the loan ( hopefully!) – It’s just up to you to ensure you have the cash flow to repay. So broadly speaking, you’re very much in control, unlike being at the whims of an equity investor.

Let’s recap some of the key sources of debt financing – they include:

Bank loans
Government Small business loans
Leasing
Mortgages

Also included in our list are:

Inventory financing
Receivables factoring
Asset based credit lines
Tax Credit Monetization
Supply Chain /PO Finance

These latter 5 monetize current assets so they are in fact a bit of a hybrid.

Most companies very quickly discover that no firm can be properly financed with 100% debt, so it’s important to keep in mind the relationship between debt and equity. That equity in fact becomes the business owners risk and that’s why it’s probably also prudent to manage your debt load.

What factors affect a company’s ability to get debt financing? In smaller to medium sized firms the actual credit status and history of the owners is very important.

Is size important in debt financing? It sure is! Many firms constantly struggle to acquire more debt based on their growth needs. We can pretty well guarantee to clients that if the proper cash flow projections are not available, realistic and accurate that not a lot of debt financing is going to take place.

Rates are of course critical in debt financing, and are typically commensurate with the risk profile of your firm, as well as the nature of the firm or bank you are dealing with. The same pretty well goes for collateral, whether that is personal or corporate as a ‘ back up ‘ to the debt financing facility.

It’s critical to exercise diligence and caution when taking on debt for your firm. Just the actual ratio of debt to equity is a good number to always monitor … 2 Time debt to equity is a commonly respected ratio. When it’s higher than that you’re forced to generate extra cash just to pay and service that debt.

We’re pretty sure that we make debt sound like somewhat of a burden. That is not the case though, as the right amount of debt and overall leverage can make your company more successful, and if there is one guarantee in life it’s that debt is cheaper than equity. And remember also that there are a number of non bank firms that can supply the debt you need if you are rejected by the banking system.

In many cases rates and size of the loan or loans you seek might be appropriate but the overall conditions the loan demands may not be suitable. That’s when you might well seek out and speak to a trusted, credible and experienced  business financing advisor who can assist you with your debt financing and funding needs.

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