Tweet

Financing Your Company

Written by: Stan Prokop

Article Overview: The articles discusses a business owners decision around the capital mix to finance a firm .

Financing Your Company

Businesses need to in essence estimate the funds they will need ' over time'. We say over time because those funds will cover different periods in the company's growth.

Broadly speaking we can call this 'financial planning ', however the whole process is somewhat more complicated due to the external financial and economic environment.

Naturally after a firm develops some solid estimates around capital and growth needs the question then becomes 'How much of this funding should be borrowed via debt?'

Contrary to what management and financial mangers understand, debt is actually the cheapest for of long term financing, supplemented of course by the fact that the interest on the debt is tax deductible. So should the business owner or financial executive take on all that debt? Clearly too much debt will restrict and potentially damage the firm, and perhaps even exposing the company to failure. Having said all that the business owner still then has a legitimate right to ask "What is the appropriate amount of debt for my company then?"

The answer is that a company has to plan towards finding a target debt ratio, or capacity that reflects their business and industry, as well as the concerns of any of the owners, re: guarantees, etc.

The essence of the business owner's analysis is the ability to understand the company cash flows which will pay down, or service that debt. Most business owners don't do enough planning in this area, and their analysis needs to be much more formalized.

Company owners quickly understand that because there is a limit to how much debt a company can take on, there has potentially to be an influx of owner or equity capital. Business owners and equity investors at that time have to have a strong sense of the value of the company both currently and on a longer term basis.

Business owners must be totally focused in the current environment of understanding the current realities of loan and debt negotiation. It is here an experienced advisor can become invaluable. Quality of the lending partner becomes key here. Most business owners eventually realize that all the banks have, give or take the same rates. They don't have the same people though! Therefore quality of service and commitment from the lender becomes ultra important.

In summary, business owners need to constantly assess their needs for debt or equity capital. Those needs are immediate, intermediate, or over the longer term. Cash flow and owner philosophy on borrowing will dictate how much capital, and as we have seen, from where it comes. Owners that plan and understand the borrowing market will be more successful than those that do not.

Related Articles
  Working Capital Financing
  12 Types of Business Financing in Canada - Which Do You Need? Commercial Loans & Cash Flow Finance
  Preparing For Financing Accounts Receivables in Canada - AR & Contract Finance Must Knows!
  How to Finance Your Franchise Business Opportunity
  Finding Information on Small Business Loans

Article Tags: financing a business



Related Forum Posts
How to valuate a business - Hi Garth - here is how we did it at Northern Crown Capital when I was helping them raise venture capital for Toronto-based entrepreneurs. Assume the start date is 2003 so 2008 projections are 5 years out: How Northern Crown Capital Valuates a Business 2008 Financial Projections Earnings Before Tax $5,865,000 Tax Rate 42% Taxes $2,463,300 Net Earnings $3,401,700 Amount Seeking to Raise Today $3,500,000 Discounted Value of Future Opportunity, 5 Years Out 2008 P/E Ratio 15 Value of Company in 2008 $51,025,500 Discount Rate Applied 30% Year 2008 $51,025,500 Year 2007 $35,717,850 Year 2006 $25,002,495 Year 2005 $17,501,747 Year 2004 $12,251,223 Value of Company at Investment in 2003 $12,251,223 Less: Investment Amount $3,500,000 Present Value $8,751,223 Discount for Risk & Private Company 40% Less: Discount for Risk & Private Company $3,500,489 Private Company Value $5,250,734 Present Value (What the Owner Keeps) $5,250,734 60.00% Financing (What the Investor Gets) $3,500,000 40.00% Total $8,750,734 100.00% I hope this helps!
grants for restaurants - Well friend I don’t have any idea about government grants for restaurants, but I will recommend that you may try on some banks who offer loans for small business where the government will have some guarantee. Beside that Restaurants business is very risky so some of banks who gave some Financing Loans they will look at on it if there is enough solid business plans.
Hi everyone - Hi everyone.I am Alex,SEO Analyst on XSEO Company.Nice forum.
Re: How to finance your independent movie - Hi, The video doesn't come up with its own URL... But it's the very bottom video on the page. Here's the description of it: Financing, Production and Social Impact of Feature Films Host- Carol Atwood - Founder, Spartacus Media Enterprises Panelists: Bill Johnson - Co-Founder and Partner, Inferno Distribution Steven Haft - Producer, Media Consultant Michael Goorjian - Actor, Producer, Writer
re: restaurant start-up - I'm not sure about government grants for restaurants, but my recommendation would be to approach a lender that offers loans under the Canadian Small Business Financing Loan program where the government will guarantee 85% of the loan. You can borrow up to $250,000 to finance equipment and renovations under this program. Restaurants are very risky business, however some of the Chartered Banks will look at restaurants if there is enough of an initial equity investment and you have a solid business plan (experienced management team, good concept and strategic location).


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Four Secrets to Earning Income as an Author

Resolving A Conflict Between Two Sales Staffs

Track Your Time for Increased Productivity

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.