At one point or another all business owners and financials managers find they have to focus on either working capital or debt financing business loan type solutions for the growth or perhaps even the survival of their firm.
The ‘ go to ‘ solution seems intuitively always to consider additional debt for the company – part of the reason is that the leverage that business loans via debt provide and pay off in higher returns on equity . Larger firms consider this as a potential means to obtain a higher valuation.
But is debt always the way to go … not necessarily as there can be some troubling side effects for the starving patient! Working capital and debt financing are of course, when considered as a whole, the alternative to raising additional equity, bringing in a partner, having to consider the sale of your firm, etc.
So is there ways to consider ‘ sensible’ business financing that actually make sense to the business owner of financial managers of a firm? We think there are.
Certainly there is nothing wrong with debt per se… It’s just that we hope in business that its ‘ good debt ‘. Business people recognize that as debt grows on your balance sheet (and assuming you can make the payments) your return on equity increases considerably. That’s a good thing! Higher sales will increase profits under that strategy. But again, at the end of the day it’s all about not pushing your firm to the brink with that increased debt.
The challenge also is that when firms use debt in an aggressive fashion they often have challenges in raising funding quickly, at rates that make sense and they are deserving of. At the extreme end of the curve debt will of course force a company to miss out on lost opportunities, competitors also seem to have a keen knack of sensing your weaknesses!… and in general day to day operating is often affected by the focus on debt repayments .
So are there some key management points and techniques to asses whether you should be taking on more debt. Here are some issues to consider.
Look at your financing needs from a longer term perspective; that’s often difficult to do and disregarded by many. Look at it from the viewpoint of can you defer financing additional debt without missing out on opportunities for growth.
At the same time, are you aware of the types of debt financing that might work for your firm. In Canada that consists of term loans, asset financing, cash flow loans, and other subordinated debt scenarios. Ensure you are comfortable with the rates and structures of each type of financing – more importantly from a time wasting point of view ensure you are aware of the requirements that each type of lender has for all those different debt scenarios.
This is of course the time to do some keen financial planning around your ability to meet any debt payments – and it’s a good time to consider worst case scenarios of not being able to make payments.
When debt financing isn’t the answer a working capital solution often can work. That could involve monetization of current assets via an asset based line of credit, receivable financing, securitization, or financing of tax credits or an asset sale leaseback for working capital purposes.
The best time to address finance needs is often when things are going well for your firm; consider speaking to a trusted credible and experienced Canadian business financing advisor who can assist you in business loan or working capital finance.