This is money loaned to the business from outside source that is paid back over time.
Key considerations in debt financing include:
- Retaining more control over your business.
- Payments strain on the cash flow.
- Imposition of restraints and conditions for repayment of the loan.
Types of debt financing are:
- Operating (A/R and Inventory)
- Short term (current assets)
- Long term (fixed assets)
Timing of financing
Entrepreneur who approaches a financier must be thoroughly prepared. This involves completing the business plan. There are ten factors to consider when an entrepreneur is timing for finance. These include:
1. Be prepared when meeting with an investor or banker. Have a completed business plan, executive summary or prospectus, and financial statements with you.
Demonstrate your knowledge of the industry
Know the strengths and weakness of your plan
Understand your financial information
Be clear and concise about the opportunity
2. Make sure you have the ability to repay or retire the investment.
3. Emphasize Managerial Abilities and credentials; particularly with equity investors whose investment decisions are largely driven by their confidence in your ability to grow the company.
4. Invest some of your own capital to demonstrate your own commitment and belief in the business.
5. Develop a long term financing strategy.
6. Find financing to suit your business. Be prepared to walk away from a deal if you don’t like it. (Easy Finance and Teachers).
7. Seek strategic alliances or joint ventures with suppliers or clients to leverage your financial resources.
8. Use your contacts. Networking is the key to “getting the world out”.
Make a list of everyone you know.
Add a list of everyone they know.
You will be amazed at how you can came up with someone who knows, or knows someone who knows, a key investor you may be trying to get reach. This really works!
9. Re-examine the capital structure of your business regularly to ensure it is appropriate. Proportion of bank financing, private investment and owner’s equity may change depending on the circumstances.
10. Know your financing objectives. Do you want to control or do you want growth? Sometimes financing growth means giving up control.